Chapter 6, Problem 6.6ACQ

Summary Introduction

To discuss: The difference between nominal and real rate of return and identify the rate that is important to the investor.

Introduction:

A bond refers to the debt securities issued by the governments or corporations for raising capital. The borrower does not return the face value until maturity. However, the investor receives the coupons every year until the date of maturity.

Nominal rate refers to the rate of return on a bond instrument before adjusting the inflation rate.

Real rate refers to the rate of return on a bond instrument after adjusting the inflation rate.