
Real rate of return
Today you purchased a bond for 98.7. bond matures in 5 yrs, coupon rate 6.5%, paying interest semiannually. If you hold the bond to maturity what is the real rate of return if inflation remains constant @ 2%"
I started by estimating yield to maturity assuming bond selling at a discount with a face value of 100
bond value = 6.5(11/(1+.068)^5/.068+100/(1+.068)^5=98.76 approx
so approx yield 6.8% (semiannually) so 6.8/2=3.4
EAR = (1+.034)^21=6.9% approx
1+R=(1+r)*(1+h)
1+.069=(1+r)*(1+.02)
1.069=(1+r)*1.02
1+r=1.069/1.02
r=4.8% approx
Am I on the right track?
Thanks