A bond par value is $2,000 and the coupon rate is 5.8 percent. The bond price was $1,946.47 at the beginning of the year and $1,981.96 at the end of the year. The inflation rate for the year was 3.1 percent. What was the bond's real return for the year

The bond's real return for the year is 4.54%

Explanation:

In order to calculate the bond's real return for the year we would have to calculate first the nominal rate of return as follows:

nominal rate of return=(price end+coupon-price beginning/price beginning)*100

nominal rate of return=(price end+coupon rate*par value-price beginning/price beginning)*100

nominal rate of return=($1,981.96+0.058*$2,000-$1,946.47/$1,946.47)*100

nominal rate of return=7.78%

Therefore, in order to calculate the bond's real return for the year we would have to use the following formula:

(1+real rate of return)*(1+inflation)=(1+nominal rate of return)

(1+real rate of return)=(1+nominal rate of return)/(1+inflation)

(1+real rate of return)=(1+0.078)/(1+0.031)

(1+real rate of return)=1.0454

real rate of return=4.54%

The bond's real return for the year is 4.54%

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