An inflation-indexed 3-year, annual 4% coupon bond issued by Thailand at par (Present Value =Par Value = 100 Thai Bhat initially). Inflation in Thailand increases by 5 % in year 1, by 4 % in year 2, and zero % in year 3. What is the maturity / face value of the bond in Thai Bhat at end of year 3?
a. |
Bhat 109 |
|
b. |
Bhat 100 |
|
c. |
Bhat 109.2 |
|
d. |
Bhat 103 |
Answer - Option C (Bhat 109.2)
Calculation :-
Face Value of Bond in inflation-indexed bond = Face Value( 1 + Inflation rate)
Face Value of Bond in year 1 = 100(1.05)
Face Value of Bond in year 1 = 105 Thai Bhat
Face Value of Bond in year 2 = Face Value of Bond in year 1 ( 1 + Inflation rate)
Face Value of Bond in year 2 = 105(1.04)
Face Value of Bond in year 2 = 109.20 Thai Bhat
Face Value of Bond in year 3 = Face Value of Bond in year 2 ( 1 + Inflation rate)
Therefore;
Face Value of Bond in year 3 = 109.20(1)
Face Value of Bond in year 3 = 109.20 Thai Bhat
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