The bonds of Frank's Welding, Inc. pay an 8% coupon, have a 7.98% yield to maturity and have a face value of $1,000. The current rate of inflation is 2.5%. What is the real rate of return on these bonds?

A) 5.32%
B) 5.35%
C) 5.37%
D) 5.42%
E) 5.48%

The real rate of return can be calculated using the Fisher equation, which is approximately: real rate = nominal rate - inflation rate. Here, the nominal rate is the yield to maturity, which is 7.98%. Subtracting the inflation rate of 2.5% from 7.98% gives a real rate of return of approximately 5.48%. However, due to a calculation oversight, the correct interpretation of the Fisher equation in this context should lead to a recalculated answer that aligns with the options provided. Given the options and the typical approach to such calculations, the correct answer intended seems to be a misinterpretation of the calculation process. Re-evaluating with the correct application of the Fisher equation or considering the approximation for small percentages (real rate ≈ nominal rate - inflation rate), the answer provided does not match the correct calculation based on the given data. The correct calculation should directly apply the given numbers: 7.98% - 2.5% = 5.48%, which suggests a mistake in the initial response. The correct choice should reflect the accurate calculation based on the Fisher equation, which appears to have been misunderstood in the initial response.