PROBLEM # $4(6$ Marks$)-$ Chapter $11$

Suppose you buy a bond for $$1,432$ with a $10-$year maturity paying an annual

coupon of $$80.$

A year later interest rates have dropped, and the bond's price has increased

to $$1,482.$

What is the nominal rate of return and the real rate of return? Assume the

inflation rate is $4\mathrm{.}3\%.$

FORMULAS

Percentage return $=\frac{\text{c}\text{a}\text{p}\text{i}\text{t}\text{a}\text{l}\text{g}\text{a}\text{i}\text{n}+\text{d}\text{i}\text{v}\text{i}\text{d}\text{e}\text{n}\text{d}}{\text{i}\text{n}\text{i}\text{t}\text{i}\text{a}\text{l}\text{s}\text{h}\text{a}\text{r}\text{e}\text{p}\text{r}\text{i}\text{c}\text{e}}$

Real rate $of$ return $=\frac{1+\text{n}\text{o}\text{m}\text{i}\text{n}\text{a}\text{l}\text{r}\text{e}\text{t}\text{u}\text{r}\text{n}}{1+\text{i}\text{n}\text{f}\text{l}\text{a}\text{t}\text{i}\text{o}\text{n}\text{r}\text{a}\text{t}\text{e}}$

$)$

STANDARD DEVIATION $=$ 'Square Root' of the variance.

Flotation Costs $=$ Indirect Costs $+$ Direct Costs

Growth $(g)=$ Return on Equity $x$ Plowback

PVGO $=\frac{\text{D}\text{I}\text{V}1}{r-g},-,\frac{\text{D}\text{I}\text{V}1}{r}(g=0,$ because there $isno$ growth $)$