In 2022, the US economy experienced higher than average rate of inflation which affected bond and equity markets. Investors typically consider US treasury bonds to be "risk-free" since they are theoretically free from default risk since the US government could always print money to cover pay off its debts. However, T Bonds are susceptible to other risks such as inflation and price risk. Let us consider the following scenario:

On 1/1/2022, a 10-year T Bond was issued at par value with a 1.51% coupon rate. By the end of the year, at 12/31/2022, interest rates had risen to 3.88%. Answer the following questions about the bond. (for simplicity, assume the bond pays annual coupons. Also, when pricing the bond, assume n = 10 for both dates, 1/1/2022 and 12/31/2022 even though the two dates are technically 365 days apart)

a. What is the price of the bond at issuance (on 1/1/22)? What is the price of the bond at 12/31/22 (again, assume n=10 even though technically it is at the end of the year)?

b. If you would have purchased the bond at the price at 1/1/22 and held it until 12/31/22, what is the nominal return on your investment (calculate both the price depreciation and also the coupon received during the year)?

c. During 2022, the rate of inflation was 6.42%. Using the formula for the Fisher Effect (on page 195 and 196 of your textbook), what is the real return on the bond over the year? Comment on the riskiness of bonds