b. 4% yield is interest rate
c. Most likely you sold it for $101 a 1% premium over the original yield. The seller has a bond that has a 4% yield, but the market says that bond should produce a yield of 5%. Since the contractual payment (coupon) is fixed the only other way a seller can be compensated for the extra 1% is for the buyer to pay more than the face value ($100) of the bond hence $101.
d. Real return = nominal return-inflation =5%-2%=3%
You purchased a bond that promises annual payments of $4.You investment horizon is one year. You purchased the console when the interest rate was 4 percent and then sold it one year later, following the rise in the interest rate to 5 percent.
a. What price did you pay for the console?
b. What was the yield on the console when you purchased it?
c. What was your holding period return on the console? Was it greater or less than the yield on console? Why?
d. If inflation rate in the year you sold the console was 2%, what was your real return on the console?
