Question 1. (Interest Rates and Bond Valuation)

(1) Find out values of following bonds. YTM is 7%, and Time to maturity is 10 years

Bond A: 3.5% of coupon paid semiannually, Face value = $1,000,000 Bond B: 0% of coupon, Face value = $5,000,000 Bond C: 10% of coupon paid annually, Face value = $3,500,000

(2) Suppose you will receive money of $ 20,000 worth of purchasing power for 5 years. The first payment will be given at the end of this year. Assuming the inflation rate is 10% and nominal discount rate is 15%, what is the present value of these cash flows? Provide answer in two ways.

1) Discount nominal cashflows with nominal rates

2) Discount real cashflows with real rates Hint: Use Fisher Effect