Marie bought a five-year 4.25 percent annual coupon bond for $974 a year ago.Today,she sold the bond at the market yield of 4 percent.What is Marie's approximate real rate of return if the inflation rate over the past year was 2.2 percent?

Question

Quizplus · Accepted Answer

Compute bond price: N=4,I/Y=4,PMT=$42.50,FV=$1,000 F1S1S1W1F1F1F10 PV = -$1,009.07.Nominal return = (42.5 + 1009.07 -974)/(974)= 7.96%.Approximate real rate = 7.96% - 2.2% = 5.76%.

Marie Bought a Five-Year 4