
B-230 SOLUTIONS
Intermediate
13. To find the real return, we first need to find the nominal return, which means we need the current price
of the bond. Going back to the chapter on pricing bonds, we find the current price is:
P
1 = $80(PVIFA7%,6) + $1,000(PVIF7%,6) = $1,047.67
So the nominal return is:
R = [($1,047.67 – 1,030) + 80]/$1,030 = .0948 or 9.48%
14. Here we know the average stock return, and four of the five returns used to compute the average return.
We can work the average return equation backward to find the missing return. The average return is
calculated as:
.525 = .07 – .12 + .18 + .19 + R
R = .205 or 20.5%
The missing return has to be 20.5 percent. Now we can use the equation for the variance to find:
15. The arithmetic average return is the sum of the known returns divided by the number of returns, so:
Arithmetic average return = (.03 + .38 + .21 – .15 + .29 – .13) / 6
Arithmetic average return = .1050 or 10.50%
Using the equation for the geometric return, we find: