Question

QUESTION 1

1. Assume that you would like to earn a 7% increase in purchasing power when investing. You expect inflation to be 8% over the next year. What nominal rate should you demand?

QUESTION 3

1. Over the past year, inflation has been 2%. At the beginning of this year, you invested in a security that has returned a nominal rate of 7%. How much has your purchasing power changed?

QUESTION 7

1. A bond currently has a stated price of 140. It has 11 years left to maturity and a stated coupon rate of 8%. Coupon payments are made semiannually. If you purchase the bond today, what YTM will you earn?

Answer 1

1)

Increase in real purchasing power = 7%

Inflation rate = 8%

Nominal rate = Real purchasing power + Inflation rate= 7% + 8% = 15%

2)

Inflation rate = 2%

Nominal rate = 7%

Increase in purchasing power = Nominal rate - Inflation = 7% - 2% = 5 %

3)

Price of the bond (PV) = 140

Annual coupon = 8% * 100= 8

Semi annual coupon (PMT) = 8/2 = $ 4

Periods to maturity (nper) = 11 * 2 = 22 periods

YTM of the bond (rate) = = 1.79 % semi annual = 3.57% pa