Question

(7-7) You are considering the purchase of a coupon bond that has a face value of $1,000, pays 3.80% semi-annual coupons, and matures in 8 years. If this bond is currently selling for $953.41, estimate its yield-to-maturity (YTM). (7-8) Currently, the nominal rate prevailing in the market is 7%. If inflation is expected to be 3.25%, estimate the actual real interest rate. (7-9) If you desire a real return of 4% and you expect inflation of 1.50%, what nominal rate must you charge on a loan?

Show step by step process to answer each of the following.

Correct Answers:

7)4.50%

8) 3.632%

9)5.56%

Answer 1

7

K = Nx2

Bond Price =∑ [(Semi Annual Coupon)/(1 + YTM/2)^k]     +   Par value/(1 + YTM/2)^Nx2

k=1

K =8x2

953.41 =∑ [(3.8*1000/200)/(1 + YTM/200)^k]     +   1000/(1 + YTM/200)^8x2

k=1

YTM% = 4.5

Please ask remaining parts seperately, questions are unrelated

9