Question
Retrovik Inc. has just issued a 6-years inflation-linked coupon bond with a face value of $100. The bond has a stated annual coupon rate of
Retrovik Inc. has just issued a 6-years inflation-linked coupon bond with a face value of $100. The bond has a stated annual coupon rate of 6% and pays quarterly coupon payments. Assume that the YTM for similar inflation-linked bonds in the market is 5.3%% and the expected inflation in the market is 2.5%. a. What is the price of the bond on the issuing date? After 6 months, right after the coupon payment, the YTM for similar bonds in the market decreased to 4.9% . Suppose that the actual inflation during the first quarter was 0.3% while the actual inflation during the second quarter was 0.8%. What is the bonds price now (after 6 months)? Suppose you bought the bond when it was issued and sold it 6 months later, right before the coupon payment. What is your annual nominal (cash) realized return from investing in and selling this?
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