are the IRR and XIRR correct? and how to do part b.

5. Suppose you want to invest your savings into a 2.5%, 5-year US Treasury Inflation Protected Security (TIPS) that makes coupon payments annually on the principal adjusted for inflation. Assume that the annual inflation rates over the next five years are expected to be -2%(deflation), 3%, 2%, 1%, and -5%(deflation) respectively. a) What would the annual cash flows to you from the TIPS be over the 5-year period? What effective annual rate of return (EAIR) would you earn on this investment? b) What price would you be willing to pay for a 5-year zero coupon Treasury Bond (not adjusted for inflation) that would make you indifferent between investing in the 5-year TIPS (in 'a') vs. investing in the zero-coupon bond? Assume that you trust the inflation forecast used in 'a', and that you intend to hold either of the bonds until maturity. E F G H 4 1/15/2024 1/15/2025 29% 196 1020 1010 25.25 25.5 25.75 25.50 S 1/15/2026 -596 950 25.25 975.25 B D 1 TIPS vs Zero Coupon Bond 2 TIPS coupon rate (annual) 2.5% 3 Time (year) 0 1 2 4 Dates (any starting date would work) 1/15/2021 1/15/2022 1/15/2023 5 Expected inflation -296 396 6 Notional principal (adjusted for inflation) 1000.00 980 1030 7 Coupons 25 24.5 8 (a) Total periodic cashflows from TIPS -1000.00 25.00 24.50 9 10 (a) EATR from the TIPS: 11 IRR 1.55006% 12 13 XIRR 1.5492396 14 15 b) Required purchase price for a 5-year zero coupon bond: 16 Time (year) 0 1 2 17 Dates 1/15/2021 1/15/2022 1/15/2023 18 Cash flows -1000 ? 2 19 Rate 1.5596 20 Par value 1000 21 Coupon payment $15.50 22 # of periods 5 23 Required zero coupon bond price 24 3 1/15/2024 ? 4 1/15/2025 2 5 1/15/2026 100002 5. Suppose you want to invest your savings into a 2.5%, 5-year US Treasury Inflation Protected Security (TIPS) that makes coupon payments annually on the principal adjusted for inflation. Assume that the annual inflation rates over the next five years are expected to be -2%(deflation), 3%, 2%, 1%, and -5%(deflation) respectively. a) What would the annual cash flows to you from the TIPS be over the 5-year period? What effective annual rate of return (EAIR) would you earn on this investment? b) What price would you be willing to pay for a 5-year zero coupon Treasury Bond (not adjusted for inflation) that would make you indifferent between investing in the 5-year TIPS (in 'a') vs. investing in the zero-coupon bond? Assume that you trust the inflation forecast used in 'a', and that you intend to hold either of the bonds until maturity. E F G H 4 1/15/2024 1/15/2025 29% 196 1020 1010 25.25 25.5 25.75 25.50 S 1/15/2026 -596 950 25.25 975.25 B D 1 TIPS vs Zero Coupon Bond 2 TIPS coupon rate (annual) 2.5% 3 Time (year) 0 1 2 4 Dates (any starting date would work) 1/15/2021 1/15/2022 1/15/2023 5 Expected inflation -296 396 6 Notional principal (adjusted for inflation) 1000.00 980 1030 7 Coupons 25 24.5 8 (a) Total periodic cashflows from TIPS -1000.00 25.00 24.50 9 10 (a) EATR from the TIPS: 11 IRR 1.55006% 12 13 XIRR 1.5492396 14 15 b) Required purchase price for a 5-year zero coupon bond: 16 Time (year) 0 1 2 17 Dates 1/15/2021 1/15/2022 1/15/2023 18 Cash flows -1000 ? 2 19 Rate 1.5596 20 Par value 1000 21 Coupon payment $15.50 22 # of periods 5 23 Required zero coupon bond price 24 3 1/15/2024 ? 4 1/15/2025 2 5 1/15/2026 100002