Question

16. 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 103 b. Bhat 100 c. Bhat 109 d. Bhat 109.2

Answer 1

Answer - Option D (Bhat 109.20)

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)

Face Value of Bond in year 3 = 109.20(1.0)

Therefore;

Face Value of Bond in year 3 = 109.20 Thai Bhat