Question

Suppose the real interest rate is 2.8%, and the inflation rate is 7%.

(1) How much do you need to invest now in order to get $100 in a year? Please show two approaches to calculate the answers. (Round your final answer to two decimal places)

(2) Suppose the U.S. Treasury issues 5% coupon, 3-year TIPS (Treasury Inflation-Protected Securities). What are the real cash flows on the 3-year TIPS each year? What are the nominal cash flows on the 3-years TIPS each year? (Round your final answers to two decimal places)

Please help asap...... Thanks

Answer 1

1)	Real Interest rate	2.80%
	Inflation adjusted (2.8 % x 7%)	0.20%
	IRR	3.00%
	Present Investment to get $ 100 in a year will be = ( 100 x (PVIF for 1 year @ 3 %)
	Present Investment to get $ 100 in a year will be = ( 100 x .9708 ) = $ 97.08

2)	Suppose face value of bond is $ 100
	Annual interest (100 x 5%) = $ 5
	Third year cashflow includes maturity ( 5 + 100) = $ 105

Real Cash Flow

Year	Cashflow	PVIF @ 5%	Present
			Value
(a)	(b)	(c )	(d=b x c)
1	5	0.952	4.761905
2	5	0.907	4.535147
3	105	0.864	90.70295
Real Cash Flow	100

Nominal Cash Flow

Year	Cashflow
(a)	(b)
1	5
2	5
3	105
Nominal Cash Flow	115