A company has just issued a four year inflation linked bond with a face value of $ 1000. The bond has annual stated real interest rate of 7 % and pays semi-annual coupons. Assume that the YTM on similar nominal bonds is 7%, and that the expected annual inflation rate for the next four year is 2%.

Required:

a. What is the price of the bond at issuance?

b. Suppose that a year after the bond was issued, the YTM on similar nominal bonds remained 7%, however, the expected inflation increased to 5 %. What is the price of the bond now ( one year after it was issued, after the second coupon payment) if the actual inflation in the last year was 8 % ?

c. Two years after the bond was issued, the YTM on similar nominal bonds increased to 9% and the expected inflation remained stable 5 %. What is the current price of the bond if the actual inflation in the last year was 6% (remember, the actual inflation in the previous year was 8 % )