How to Calculate Total Real Return on Investment From Lambert Sandblasting Company's Bond?
What factors should be considered when calculating the total real return on investment from Lambert Sandblasting Company's bond?
Consider factors such as face value, purchase value, market value, maturity period, annual bond rate, required return, and inflation rate.
Calculation of Total Real Return on Investment from Lambert Sandblasting Company's Bond
To calculate the total real return on investment from Lambert Sandblasting Company's bond, you need to consider various factors. Let's break down the calculation:
Face Value: The face value of the bond is $1,000, which is the amount Lambert will pay at maturity.
Purchase Value: The purchase value of the bond is $960, which is the amount you paid for the bond initially.
Market Value of the Bond Today: This is the current market value of the bond that needs to be determined to calculate the return.
Maturity Period: The bond matures in 14 years from now.
Annual Bond Rate: The bond pays 7 percent annually.
Required Return: The required return on the bonds is 8 percent.
Inflation Rate: The inflation rate over the past year was 2.7 percent.
By considering these factors, you can calculate the real return on investment from Lambert Sandblasting Company's bond.
The real return on investment is calculated by adjusting the nominal return for inflation, giving a more accurate picture of the investment's profitability. In this case, we need to determine the market value of the bond today and apply the real rate to bring all cash flows to present value.
To calculate the market value of the bond today, we need to find the present value of the annuity payments and the face value of the bond. The annuity payments are $70 annually, and the face value is $1,000 at maturity.
Considering the 8 percent market rate and 2.7 percent inflation rate, we can calculate the real rate of return to be 5.16 percent. This rate is used to discount the future cash flows to their present value.
After calculating the present value of the annuity payments and the face value, the total market value of the bond today is found to be $1,180.29. Comparing this to the purchase value of $960, the total real return on the investment is 22.9465%.
By understanding and applying these calculations, you can accurately determine the total real return on investment from Lambert Sandblasting Company's bond.