Please show work. Thank you. 1. Say you own an asset that had a total return las
ID: 2821006 • Letter: P
Question
Please show work. Thank you.
1. Say you own an asset that had a total return last year of 18 percent. Assume the inflation rate last year was 3.7 percent.
What was your real return? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
Real return %
2. Both Bond Bill and Bond Ted have 12 percent coupons, make semiannual payments, and are priced at par value. Bond Bill has 3 years to maturity, whereas Bond Ted has 20 years to maturity. Both bonds have a par value of 1,000.
If interest rates suddenly rise by 3 percent, what is the percentage change in the price of these bonds? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)
If rates were to suddenly fall by 3 percent instead, what would be the percentage change in the price of these bonds? (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)
Percentage
change in price Bond Bill % Bond Ted %
Explanation / Answer
Answer to Question 1:
Real Return = (Nominal Return - Inflation Rate) / (1 + Inflation Rate)
Real Return = (0.18 - 0.037) / (1 + 0.037)
Real Return = 0.143 / 1.037
Real Return = 0.1379 or 13.79%