Question

Finance 4200 TIPS Bond Problem The TIPS bond has an annual coupon rate of 4.5%. The table below shows the history of inflation rates for the first three years of the bond's life. Time Inflation for Yr Just Ended Par Value $1.000 13% 24% a. What was the nominal return in year 2? b. What was the real return in year 2? c. What was the nominal return in year 3? d. What was the real return in year 3? Check Answers: a. 8.68%, b. 4.5%, c.7.64%, d. 4.5%

Answer 1

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05:23 W ' vo a 1x 2 ENG 20-03-2020 12 ... 7 X EL315 EL EJ E K _ EL E M EN EO EP EQ A 292 293 294 295 INFLATION RATE TIME NOTE ON PAR VALUE 296 297 298 3% 4% 3% PAR VALUE COUPON @ 4.5% 1000 1030 46.35 [(1030 X 4.5%)] 1071.20 48.20 (1071.20 X 4.5%] 1103.34 49.65 (1104.34 X 4.5%] 1000 *(1+0.03) 1030*(1+0.04) 1071.20* (1 +0.03) 299 300 301 302 303 SECOND YEAR NOMINAL RETURN =( 48.20 + (1071.20-1030))/1030 = REAL RETURN = (1+0.0868)/(1+0.04) -1 = 8.68% 4.50% 304 305 306 THIRD YEAR NOMINAL RETURN =(49.65 + (1103.34 -1071.20))/1071.20 = REAL RETURN = (1+0.0764)/(1+0.03) -1 = 307 7.64% 4.50% 308 309 THIRD YEAR 310 NOMINAL RETURN REAL RETURN SECOND YEAR 8.68% 4.50% 7.64% 4.50% 311 312 313 314 315 1 YIELD SPOT | AFN BANKING NOTE Sheet2 51 53 | CLEAN PRICE 510 | BIDDING, UNDERWRITING EUAC AW LIFE LP, IP, MRP, INFLATION WARR ... + :