21. Julia purchased a 5 year 6% annual coupon bond one year ago for $990. She sold the bond today when the market rate of return is 4.5%. If the Consumer Price Index has increased by 2% this past year then what would be her nominal rate of return on this investment? A) 7.07% B) 8.16% C) 10.30% D) 11.67% E) 12.51%
21. Julia purchased a 5 year 6% annual coupon bond one year ago for $990. She sold the bond today when the market rate of return is 4.5%. If the Consumer Price Index has increased by 2% this past year then what would be her nominal rate of return on this investment? A) 7.07% B) 8.16% C) 10.30% D) 11.67% E) 12.51%
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
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you purcahsed a five year 6% annual coupon bond one yeta ago for 990 you sold the bond today when the market
Transcribed Image Text:21. Julia purchased a 5 year 6% annual coupon bond one year ago for $990. She sold
the bond today when the market rate of return is 4.5%. If the Consumer Price Index has
increased by 2% this past year then what would be her nominal rate of return on this
investment?
A) 7.07%
B) 8.16%
C) 10.30%
D) 11.67%
E) 12.51%
Solution E
Inflation (CPI) has no bearing on the answer as the question asks for the nominal rate of
return and not the real rate of return.
Price of bond today is the present value of future cash flows (4 years left to maturity) and
can be solved using FV = $1,000; PMT= $60; r = 1/Y= 4.5%; n = 4 therefore PV =
$1,053.81. The rate of return over the last year can be solved using FV = $1,053.81;
PV = $990; PMT= $60; n = 1 therefore r => 12.51% which is the nominal rate or return
over one year.
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