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Problem #4 (Calculating Returns)

Suppose you bought a bond with an annual coupon of 7 percent one year ago for $970. The bond sells for $940 today. A.) Assume 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?

Problem #8 (Risk Premiums)

A.) Calculate the arithmetic average returns for large-company stocks and T-bills over this period. B.) Calculate the standard deviation of the returns for large-company stocks and T-bills over this period. C.) Calculate the observed risk premium in each year for the large-company stocks versus the T-bills. What was the average risk premium over this period? What was the standard deviation of the risk premium over this period? D.) Is it possible for the risk premium to be negative before an investment is undertaken? Can the risk premium be negative after the fact? Explain.