Question

1. A Treasury inflation-protected bond that carries a 5% coupon rate is selling for $900.

Calculate:           

1. The annual interest on the current bond

2. Calculate the current dividend yield of the bond

3. The new par value with a 2.5% increase in inflation

4. New quarterly interest payment post inflation adjustment

5. Assuming a 15-year maturity on the bond, what will the par value be if inflation continues to increase at 2.5% annually? (Hint: use time value of money calc)

Answer 1

	Note: it is assumed that bond's par value is 1000
a-	annual interest on current bond	1000*5%	50
b-	Current dividend Yield on bond	coupon payment /market price = 50/900	5.56%
c-	new par value with a 2.5% increase in inflation	par value*(1+inflation rate) = 1000*(1.025)	1025
d-	Quarterly Interest payment post inflation adjustment	1025*(5%/4)	12.81
e-	par value after 15 years	par value*(1+inflation rate)^n = 1000*(1.025)^15	1448.30