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10-19I

Expert-verified
Found in: Page 330

### Essentials Of Investments

Book edition 9th
Author(s) Zvi Bodie, Alex Kane, Alan Marcus, Alan J. Marcus
Pages 748 pages
ISBN 9780078034695

# Return to Table 10.1 and calculate both the real and nominal rates of return on the TIPS bond in the second and third years.TimeInflation in Year just endedPar ValueCoupon PaymentCoupon Payment + Principal paymentTotal Payment0$1000 .0012$ 1020.00$40.800$ 40.8023$1050. 60$ 42.020$42.0231$ 1061.11$42.44$ 1061.111103.54

Second year = 7.12% and 4.00%

Third year = 5.04% and 4.00 %

See the step by step solution

## Calculation of Nominal return and real return in the second year

The formulae for Nominal Return = Interest + Price Appreciation / Initial Price

= $42.20 +$ 30.60 / $1020.00 = 0.071196 = 7.12% The formula for real return = 1 + Nominal return / 1 + Inflation rate – 1 = (1 + 0.071196) / (1 + 0.03) – 1 = 1.071196 / 1. 03 – 1 = 1.0400 – 1 = 4.00 % ## Calculation of Nominal return and real return in the third year The formulae for Nominal Return = Interest + Price Appreciation / Initial Price =$ 42.44 + $10.51 /$ 1050.60

= 0.050400

= 5.04%

The formula for real return = 1 + Nominal return / 1 + Inflation rate – 1

= (1 + 0.050400) / (1 + 0.01) – 1

= 1.050400 / 1. 01 – 1

= 1.0400 – 1

= 4.00 %