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7. Two 3-year index-linked bonds are issued on 1st January 2019. Both are redeemable at par and their nominal face value is 100. The first
7. Two 3-year index-linked bonds are issued on 1st January 2019. Both are redeemable at par and their nominal face value is 100. The first bond has a nominal coupon rate of 3% p.a. payable semi-annually and it is indexed to the Retail Price Index (RPI) with no time-lag. The second bond has a nominal coupon rate of 3.5% p.a. payable semi-annually and it is indexed to the RPI with a 6-month time lag. The RPI takes the following values Month RPI Jul. '18 Jan.'19 Jul.'19 Jan.'20 Jul.'20 Jan.'21 118 120 122 123 125 127 Jul.'21 128 Jan.'22 130 (Notice: the terms nominal and real in this context refer to inflation.) (a) (4 marks) Calculate the actual coupon payments and redemption payments made by each bond (b) (4 marks) Calculate the price at issue of the first bond if it is to produce a real yield of 4% p.a. effective
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