Interest rate fundamentals: The real rate of return Carl Foster, a trainee at an investment
banking firm, is trying to get an idea of what real rate of return investors
are expecting in today’s marketplace. He has looked up the rate paid on 3-month
U.S. Treasury bills and found it to be 5.5%. He has decided to use the rate of change
in the Consumer Price Index as a proxy for the inflationary expectations of investors.
That annualized rate now stands at 3%. On the basis of the information that
Carl has collected, what estimate can he make of the real rate of return?
The real rate of return would be 2.5%, it’s the difference between the nominal rate and the infl

flation rate.

Bond interest payments before and after taxes Charter Corp. has issued 2,500
debentures with a total principal value of $2,500,000. The bonds have a coupon
interest rate of 7%.
a. What dollar amount of interest per bond can an investor expect to receive each
year from Charter?

b. What is Charter’s total interest expense per year associated with this bond issue?