Question
The following table showing the cash flows for TIPS bonds. Time Inflation in Year Just Ended Par Value Coupon Payment + Principal Repayment = Total
The following table showing the cash flows for TIPS bonds.
| Time | Inflation in Year Just Ended | Par Value | Coupon Payment | + | Principal Repayment | = | Total Payment | ||||||||||
| 0 | $ | 1,000.00 | |||||||||||||||
| 1 | 4.00 | % | 1,040.00 | $ | 83.20 | $ | 0 | $ | 83.20 | ||||||||
| 2 | 3.00 | 1,071.20 | 85.70 | 0 | 85.70 | ||||||||||||
| 3 | 3.00 | 1,103.34 | 88.27 | 1,103.34 | 1,191.60 | ||||||||||||
a. What is the nominal rate of return on the bond in year 2? If real rate of return is 8.00% per annum (Round your answer to 2 decimal places.)
b. What is the real rate of return in year 2? (Round your answer to 2 decimal places.)
c. What is the nominal rate of return on the bond in year 3? (Round your answer to 2 decimal places.)
d. What is the real rate of return in year 3? (Round your answer to 2 decimal places.)
Step by Step Solution
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Step: 1
To calculate the nominal rate of return on the bond we need to use the following formula Nominal Rat...
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Introduction to Corporate Finance What Companies Do
Authors: John Graham, Scott Smart
3rd edition
9781111532611, 1111222282, 1111532613, 978-1111222284
