1.Novecente's has a $1,000 par-value bond with a 9% coupon rate outstanding. Interest is

paid annually, and the bond has 12 years remaining to maturity.

a. Find the value of the bond if the required return is 11%. Indicate if the bond is

selling at a discount, at a premium or at par value.

b. Find the value of the bond if the required return falls to 9%. Indicate if the bond is

selling at a discount, at a premium or at par value.

c. Find the value of the bond if the required return falls further to 8%. Indicate if the

bond is selling at a discount, at a premium or at par value.

2.Joe Black has $180.00 that he can spend on peanut butter. Each pound of peanut butter

costs $2.00. Alternatively, Bart can invest his $180.00 in an account earning 8% annual

interest for 1 year so that he can eat more peanut butter later. Economists expect a 3%

rate of inflation over the next year. (Round your answers to 0.00).

a. How many pounds of peanut butter can Joe purchase today?

b. How much money will Joe have at the end of the year if he invests his $180.00 in the

account paying 8% interest?

c. Given the expected 3% inflation, how much would you expect a pound of peanut

butter to cost at the end of 1 year?

d. How many pounds of peanut butter can Joe purchase in one year if he invests his

$180.00 in the account earning 8% interest?

e. What is Bart's real rate of return over the year measured in terms of peanut butter?

(round to 0.00% and confirm your answer with the Fisher Effect).

f. Explain why it is the real rate of return (and not the nominal rate of return) that

would affect Bart's purchasing power?