Sapna would like to receive a real return of 5 percent per year on a bond investment

Question:

Sapna would like to receive a real return of 5 percent per year on a bond investment at a time when the expected inflation rate is 2.5 percent. How much would she be willing to pay for a bond maturing in two years if it pays annual coupons at a (nominal) rate of 7 percent? If a Real Return Bond were available with a 4.5-percent (annual payments) and the same two-year maturity, how much would Sapna be willing to pay for it to achieve her desired rate of return?

Coupon
A coupon or coupon payment is the annual interest rate paid on a bond, expressed as a percentage of the face value and paid from issue date until maturity. Coupons are usually referred to in terms of the coupon rate (the sum of coupons paid in a...