Question

Suppose that you buy a two-year 8% bond at its face value, answer the following: a-1. What will be your total nominal return over the two years if inflation is 3% in the first year and 5% 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 total real return? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) Real return Real 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.) Real return Nominal return

Answer 1

no if inflation is 31- Real Rate of Return = croupon Rabie - Inflation Rato) 14 Inflation Rate ist year Real Return 0.08 + 0.03 Real Rate Of Return = 0.049 or 4.91. 1 +0.03 (it nominal Rate) = (1 + Real Rate) *(1+ inflaton Rate = (1+ 0.049) (1+0.03) 1.049 x 1.03 (It nominal Ratus) =1108047 Nominal Rate = 1.08047- Nominal Rata = 0.08 or % 200 of inflation is 57. Recal Rote of Retron - (0.08-0.09) - 0029 or 2-91. 1 +0.05 it nominal Rate = (It Real Rate) (14 in flation rati) = (1+0.029)(1+0.05) It nominal Jati 1.080u5 Nominal Rate = 1.080451 (= 8.01 Di

a 26 TIPS means treasary inflation - Poofected secuully eoں آگ Recer Rate = coupon Rate : 10Hlahon Rate 20.08-0-03 20.05 (+ nominal Rate) - ( + Real Rati) (1 + inflation rate) 1+0.05) (1+0-03) = 1.0815 nomunalrate 1.0815-1 = 0.0815 or (8.157.) and years Real Rate = Coupon Rate - inflati date - 0-08-0.05 -0.03 H+ Nominal Rate = (1+Real Rabe) (14 inflation sate] (ANR (1+0.03) (toros). Nominal Role = 1.0815-1 = 0.0815 or 6.15))