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.

Corporate Fin Focused Approach

5th Edition

ISBN:9781285660516

Author:EHRHARDT

Publisher:EHRHARDT

Chapter7: Valuation Of Stocks And Corporations

Section7.6: Valuing Nonconstant Growth Stocks

Problem 3ST

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Please use EXCEL formula to answer the question, and explain by steps

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.

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