Purchase Solution

# Returns and Variability

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1. Returns: Suppose you bought a 6 percent coupon bond one year ago for \$1040. The bond sells for 1,063 today.
a. Assuming a \$1,000 face value, what was your total dollar return on this investment over the past year?
b. What was your total nominal rate of return on this investment over the past Year?
c. If the inflation rate last year was 3 percent, what was your total real rate of return on this investment?
d. What is the ending price?

2. Calculating Returns and Variability: You've observed the following returns on Mary An Data Corporation's stock over the past five years: 27 percent, 13 percent, 18 percent, -14 percent, and 9 percent.
a. What was the arithmetic average return on Mary Ann's stock over this five-year period?
b. What was the variance of Mary Ann's returns over this period? and The standard deviation?
c. Calculating the real returns and risk Premiums, suppose the average inflation rate over this period was 4.2 percent, and the average T-bill rate over the period was 5.1 percent, what was the Average Real Return on Mary Ann's stock?
d. What was the average nominal risk premium on Mary Ann's stock?

##### Solution Summary

The returns and variability are six percent coupon bonds are determined. The average nominal risk premiums on Mary Ann's stocks.

##### Solution Preview

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Returns and Variability
1.  Returns:  Suppose you bought a 6 percent coupon bond one year ago for \$1040.  The bond sells for 1,063 today.
a.  Assuming a \$1,000 face value, what was your total dollar return on this investment over the past year?
Purchase price \$1,040.00
Selling Price \$1,063.00
Face Value \$1,000.00
Coupon Rate 6%
Coupon Payment \$60.00
Dollar Return \$83.00

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