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Suppose that now is 2020 and you decided to buy an inflation-protected bond priced at par. Its maturity is 20 years, principal payment is $1,
Suppose that now is 2020 and you decided to buy an inflation-protected bond priced at par. Its maturity is 20 years, principal payment is $1, 000 and coupon rate is 5% (all bond payments are denominated in 2020 dollars). Assume that you expect the annual inflation rate to be 2%
(a) (5 points) What is this bonds real YTM? Nominal YTM?
(b) (5 points) If interest rates stay unchanged, what will be the bonds nominal price in 2 years?
(c) (10 points) Now assume that bonds current price is $900. Redo parts (a) and (b).
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