What real rate of return is earned by a one-year investor in a bond that was purchased for $1,000, has an 8 percent coupon, and was sold for $960 when the inflation rate was 6 percent?
A)-1.89 percent
B)1.92 percent
C)5.66 percent
D)11.47 percent

Question

Quizplus · Accepted Answer

Inflation rate for the year = 6%
Real rate of return = (nominal rate of return - inflation rate) / (1+inflation rate)
Nominal rate of return = (coupon payment + selling price - buying price)/ buying price
Coupon payment = 8% of $1000 = $80
Nominal rate of return = (80+960-1000)/1000 = 0.04 or 4%
Real rate of return = (4% - 6%) / (1+6%) = -0.0189 or -1.89%
Therefore, the real rate of return earned by a one-year investor in this bond is -1.89%.

What Real Rate of Return Is Earned by a One-Year