E6-3 The YTMs for Treasuries with differing maturities (with each rate expressed as an annual rate) on a recent day were as shown in the following table. Maturity YTM 3 months 1.41% 6 months 1.71 2 years 2.68 3 years 3.01 5 years 3.70 10 years 4.51 30 years 5.25 The real rate of interest is 0.8% per year. Use the information in the preceding table to calculate the approximate inflation expectation for each maturity. E6-7 A bond with 5 years to maturity and a coupon rate of 6% has a par, or face, value of $20,000. Interest is paid annually. If the required return on this bond is 8%, what is the price of the bond? P6-3 Real and nominal rates of interest Zane Perelli currently has $100 that he can spend today on socks costing $2.50 each. Alternatively, he could invest the $100 in a risk-free U.S. Treasury security that is expected to earn a 9% nominal rate of interest. The consensus forecast of leading economists is a 5% rate of inflation over the coming year. a. How many socks can Zane purchase today? b. How much money will Zane have at the end of 1 year if he forgoes purchasing the socks today and invests his money instead? c. How much would you expect the socks to cost at the end of 1 year in light of the expected inflation? d. Use your findings in parts b and c to determine how many socks (fractions are OK) Zane can purchase at the end of 1 year. In percentage terms, how many more or fewer socks can Zane buy at the end of 1 year? e. What is Zane's real rate of return over the year? How is it related to the percentage change in Zane's buying power found in part d? Explain.