On January 1, 2011 you bought a two-year U.S. government bond with a principal (face value) of $1000 and a coupon rate of 6% with coupons paid on December 31, 2011 and December 31, 2012. The principal will be repaid on December 31, 2012. The Consumer Price Index (CPI) was 120 on January 1, 2011 and 126 on January 1, 2012. You decide to sell your bond on January 1, 2012 when the interest rate on brand-new U.S. government one-year bonds is 3%. What was the actual (ex post) nominal one-year return on your bond for your one-year holding period? What was the actual (ex post) real return?

Question

On January 1, 2011 you bought a two-year U.S. government bond with a principal (face value) of $1000 and a coupon rate of 6% with coupons paid on December 31, 2011 and December 31, 2012.  The principal will be repaid on December 31, 2012.   The Consumer Price Index (CPI) was 120 on January 1, 2011 and 126 on January 1, 2012.  You decide to sell your bond on January 1, 2012 when the interest rate on brand-new U.S. government one-year bonds is 3%.  What was the actual (ex post) nominal one-year return on your bond for your one-year holding period?  What was the actual (ex post) real return?

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