On January 1, 2006, Joan James purchased five 7.2% semi-annual bonds with twenty years to maturity. The maturity value of each bond is $1000, and it makes its coupon payments on June 30 and December 31 of each year. At the time of the purchase, the bonds yield to maturity was 7.8%. On 1/1/2012, Joan sells the bonds, which are now yielding 4.6%. Answer the following questions:

1. What is the purchase price of the bonds?
2. What is the sell price of the bonds?
3. What nominal rate of return did Joan receive on this investment; i.e., what is her holding period yield? Hint: you must consider the time value of money when answering this question.
4. When Joan purchased the bond, its yield to maturity was 7.8%. Why is her holding period yield different than 7.8%?
5. If the average inflation rate over this holding period was 3.1%, what was Joans real rate of return using the Fisher equation 5.2 in your text¹?

¹ Equation 5.2: 1 + R = (1 + r) (1 + h) where R = nominal rate of return, r = real rate of return, and h = the inflation rate.