You're given two investment options: Bond X: A regular 2-year bond with a coupon rate of 4% per year, payable semi-annually. Its current price is $975. Bond Y: A 2-year real-return bond with a coupon rate of 3% per year, payable annually. Its current price is $980. What is the average annual inflation rate over the next 2 years that would make the nominal rates of return of the two choices the same? Use continuous compounding only
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You're given two investment options:
Bond X: A regular 2-year bond with a coupon rate of 4% per year, payable semi-annually. Its current price is $975.
Bond Y: A 2-year real-return bond with a coupon rate of 3% per year, payable annually. Its current price is $980.
What is the average annual inflation rate over the next 2 years that would make the nominal rates of return of the two choices the same?
Use continuous compounding only
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- Suppose that you buy a TIPS (inflation-indexed) bond with a 1-year maturity and a coupon of 2% paid annually. Assume you buy the bond at its face value of $1,000, and the inflation rate is 10%. a. What will be your cash flow at the end of the year? (Do not round intermediate calculations. Round your answer to 2 decimal places.) b. What will be your real return? c. What will be your nominal return? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)Consider a bond paying a coupon rate of 10% per year semi-annually when the market interest rate is only 4% per half-year. The bond has three years until maturity. This initial payment is $1000. A: What is find the bond’s price today and 6 months time after the next coupon is paid? B: What is the total rate of return on the bond?You will receive $100 from a savings bond in 3 years. The nominal interest rate is 8%. a. What is the present value of the proceeds from the bond? b. If the inflation rate over the next few years is expected to be 3%, what will the real value of the $100 payoff be in terms of today's dollars? C. What is the real interest rate? d. Show that the real payoff from the bond [from part (b)] discounted at the real interest rate [from part (c)] gives the same present value for the bond as you found in part (a).
- You can enter into a forward contract for a bond with a maturity in one year months that pays a coupon payment of $25 every six months. The bond has a forward price of $930. The current zero coupon rate for 6 months is 4% annually and the zero coupon risk free rate for one year is 5% annually (assume continuous compounding). The current price of the bond is $943. Use the equilibrium forward price equation (F=Sert) adjusted for both coupon payments to see if an arbitrage opportunity exists. If arbitrage is possible, explain the arbitrage opportunity that exists and show how the profit can be earned – make sure to explain every step in detail in realizing the profit and establishing the arbitrage. If arbitrage is not possible, show how you know it is not possible. ANSWER IN TYPING OTHER WISE DOWNVOTE YOUSuppose that you buy a two-year 8% bond at its face value. a. What will be your total nominal return over the two years if inflation is 3% in the first year and 5% in the second? b. What will be your total real return?Suppose that you buy a two-year 8% bond at its face value.(a) What will be your total nominal return over the two years if inflation is 3% in the first year and 5% in the second? What will be your total real return? (b) Now suppose that the bond is a TIPS. What will be your total two-year real and nominal returns?
- Suppose that you buy a two-year 8.9% bond at its face value. a-1. What will be your total nominal return over the two years if inflation is 3.9% in the first year and 5.9% in the second? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) a-2. What will be your total real return? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) b. Now suppose that the bond is a TIPS. What will be your total 2-year real and nominal returns? (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.)Suppose that you buy a two-year 7.3% bond at its face value. a-1. What will be your total nominal return over the two years if inflation is 2.3% in the first year and 4.3% in the second? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) Nominal return a-2. What will be your real return? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) Real return % % Real return Nominal return b. Now suppose that the bond is a TIPS. What will be your total 2-year real and nominal returns? (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.) 1%Suppose that you buy a TIPS (inflation - indexed) bond with a 2- year maturity and a (real) coupon of 4.5% paid annually. If you buy the bond at its face value of $1,000, and the inflation rate is 8.75% in each year. What will be your cash flow in year 1 ?
- A bond pays $10,000 per year for the next 10 years. The bond costs $90,000 now. Inflation is expected to be 6 percent over the next 10 years. Answer parts (a) and (b). a. What is the current dollar internal rate of return? Use linear interpolation with x, = 1.95% and x, = 2.00% to find your answer. The current dollar internal rate of return is percent. (Type an integer or decimal rounded to two decimal places as needed.) b. What is the real internal rate of return? The real internal rate of return is percent. (Type an integer or decimal rounded to two decimal places as needed.)Consider a bond (with par value = $1,000) paying a coupon rate of 10% per year semiannually when the market interest rate is only 4% per half-year. The bond has three years until maturity. Required: a. Find the bond's price today and six months from now after the next coupon is paid. b. What is the total (6-month) rate of return on the bond? Complete this question by entering your answers in the tabs below. Required A Required B Find the bond's price today and six months from now after the next coupon is paid. Note: Round your answers to 2 decimal places. Current price Price after six months $ $ 1,052.42 1,044.52Over the next three years, the expected path of 1-year interest rates 4, 1, and 1 percent. Today if you buy $1 of one-year bond and when it matures you use the money you receive to buy another one-year bond. then your expected rate of return for this $1 investment is ____% (round to the nearest integer). If the expectations theory of the term structure is true, then it implies that the current interest rat ein 2-year bond must be ____% (round to one decimal place x.x)