4. Calculating Returns [LO1] Suppose you bought a bond with an annual coupon of 7 percent one year ago for $1,010. The bond sells for $985 today. a. Assuming a $1,000 face value, what was your total dollar return on this investment over the past year? b. What was your total nominal rate of return on this investment over the past year? c. If the inflation rate last year was 3 percent, what was your total real rate of return on this investment? Rar+h 7.4 EXAMPLE 7.5 The Fisher Effect If investors require a 10 percent real rate of return, and the inflation rate is 8 percent, what must be the approximate nominal rate? The exact nominal rate? The nominal rate is approximately equal to the sum of the real rate and the inflation rate: 10% + 8% = 18%. From the Fisher effect, we have: 1+R = (1+r) × (1+h) = 1.10 x 1.08 = 1.1880 Therefore, the nominal rate will actually be closer to 19 percent.
4. Calculating Returns [LO1] Suppose you bought a bond with an annual coupon of 7 percent one year ago for $1,010. The bond sells for $985 today. a. Assuming a $1,000 face value, what was your total dollar return on this investment over the past year? b. What was your total nominal rate of return on this investment over the past year? c. If the inflation rate last year was 3 percent, what was your total real rate of return on this investment? Rar+h 7.4 EXAMPLE 7.5 The Fisher Effect If investors require a 10 percent real rate of return, and the inflation rate is 8 percent, what must be the approximate nominal rate? The exact nominal rate? The nominal rate is approximately equal to the sum of the real rate and the inflation rate: 10% + 8% = 18%. From the Fisher effect, we have: 1+R = (1+r) × (1+h) = 1.10 x 1.08 = 1.1880 Therefore, the nominal rate will actually be closer to 19 percent.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
Related questions
Question
100%
Please use EXCEL formula to answer the question, and explain by steps
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution!
Trending now
This is a popular solution!
Step by step
Solved in 2 steps with 2 images
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Recommended textbooks for you
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education