Question

3. Park 4.11 A 10-year $1,000 bond pays a nominal rate of 9% compounded semi-annually. If the market interest rate is 12% compounded annually and the general inflation rate is 6% per year, find the actual- and constant-dollar amounts (in time-0 dollars) of the 15th interest payment on the bond.

Answer 1

page-1 om Answer:- * Given data from » In order to get through this problem in the least amount of time and hassle , one needs to first determine which interest rates are applicable to the problem at hand. - Giren are the market interest Xate (12%), inflation rate (6%) and bond's interest Payment rate (9 %). » Beginning with the gst of two interest rate applications, the first one that must be executed here is to determine the interest payment in actual dollars. - simply put, on a nominal stance, the amount of interest applicable here is approximately $45.00 per period.

Page 2 => with this part of the problem through is one cave at that can throw the whole thing out the window when doing the formula below, the time period must be in an annual sense - or in this case 7.50 years since this is the 15th payment of interest failure to do this will cause an error in the calculation that is warranted. formula and calculations below: Is af 64, 75N)/ 0 where, P= the present worth of a cash flow series. to the future worth of a cash flow series It's the invested interest rate of retuon N= the no. of the periods applicable to the Situation at hand and

page-3 - All one would to do here is to apply the information that we have above to get the desired result for the Problem at hand below: -> Is =f(, ;', N) => Iis = $45.00 (P18 10:06, 7.50) In this situation, one would want to look at the second column for the other factor value applicable here (P/f , i, n. - In this situation , since the factor value is not quite in the back. In this situation, the amount would be approximately 0.6460 and we continue the problem below. -

page-4 3) Ijs = $45.00 (L4 10:06, 7:50) 1. Ils = $4500 (0.646) :: IiŚ - $ 29.07 Thus, the 15th payment that is in constant dollars is approximately $ 29-07 - X -