Question 2 Not yet answered Marked out of 10.00 Flag question A government issued index linked bonds on 1 June 2018 which were redeemed on 1 June 2020. Each bond had a nominal coupon of 2% per annum, payable half-yearly in arrears. The coupon and redemption payments were indexed according to the increase in the consumer price index between 3 months before the issue date and 3 months before the relevant payment dates. An investor purchased $5m nominal of the bond at the issue date and held the bond until redemption. The income tax rate on coupon payments was 20%. The values of the consumer price index in the relevant months were: Date Consumer Price Index Mar-18 112 Jun-18 115 Sep-18 116 Dec-18 117 Mar-19 118 Jun-19 120 Sep-19 120 Dec-19 121 Mar-20 121 Jun-20 122 a). Calculate the net incoming cash-flows received by the investor. (4 marks) b). Calculate the cash-flows in terms of June 2018 prices. (3 marks) c). Calculate the purchase price of the bond if the money yield achieved by the investor is 2% per annum. (2 marks) d). In September 2018, the government announced that it might change the index to which the bond payments are linked to another one which tends to rise more slowly than the CPI. Explain the likely impact of such a change on the price of index linked bonds. (1 mark) Paragraph BIE Question 2 Not yet answered Marked out of 10.00 Flag question A government issued index linked bonds on 1 June 2018 which were redeemed on 1 June 2020. Each bond had a nominal coupon of 2% per annum, payable half-yearly in arrears. The coupon and redemption payments were indexed according to the increase in the consumer price index between 3 months before the issue date and 3 months before the relevant payment dates. An investor purchased $5m nominal of the bond at the issue date and held the bond until redemption. The income tax rate on coupon payments was 20%. The values of the consumer price index in the relevant months were: Date Consumer Price Index Mar-18 112 Jun-18 115 Sep-18 116 Dec-18 117 Mar-19 118 Jun-19 120 Sep-19 120 Dec-19 121 Mar-20 121 Jun-20 122 a). Calculate the net incoming cash-flows received by the investor. (4 marks) b). Calculate the cash-flows in terms of June 2018 prices. (3 marks) c). Calculate the purchase price of the bond if the money yield achieved by the investor is 2% per annum. (2 marks) d). In September 2018, the government announced that it might change the index to which the bond payments are linked to another one which tends to rise more slowly than the CPI. Explain the likely impact of such a change on the price of index linked bonds. (1 mark) Paragraph BIE
