Question 1. (Interest Rates and Bond Valuation) Solve the following questions (30 points)

(1) Find out values of following bonds. YTM is 7%, and Time to maturity is 10 years (15 points) 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. (15 points)

1) Discount nominal cashflows with nominal rates

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