You want to have $2.6 million in real dollars in an account when you retire in 40 years. The nominal return on your investment is 10.8 percent and the inflation rate is 3.7 percent. What real amount must you deposit each year to achieve your goal?

Chapter 7 Learning Outcomes (LO) LO1 - Understand the variation of bond values and yields LO2 - Understand the impact of inflation on interest rates Textbook (RWJ) After-Chapter Questions & Problems 1 Bond Yields [LO1] Heginbotham Corp. issued 20-year bonds two years ago at a coupon rate of 5.3 percent. The bonds make semiannual payments. If these bonds currently sell for 105 percent of par value, what is the YTM? 1 Coupon Rates [LO1] DMA Corporation has bonds on the market with 14.5 years to maturity, a YTM of 5.3 percent, a par value of $1,000, and a current price of $965. The bonds make semiannual payments. What must the coupon rate be on these bonds? 1 Zero Coupon Bonds [LO1] You find a zero coupon bond with a par value of $10,000 and 17 years to maturity. If the yield to maturity on this bond is 4.9 percent, what is the price of the bond? Assume semiannual compounding periods. 1 Calculating Real Rates of Return [LO2] If Treasury bills are currently paying 5.1 percent and the inflation rate is 2.2 percent, what is the approximate real rate of interest? The exact real rate? 1 Nominal and Real Returns [LO2] An investment offers a total return of 11.5 percent over the coming year. Janice Yellen thinks the total real return on this investment will be only 9 percent. What does Janice believe the inflation rate will be over the next year? 1 Interest Rate Risk [LO1] Both Bond Sam and Bond Dave have 6.5 percent coupons, make semiannual payments, and are priced at par value. Bond Sam has 3 years to maturity, whereas Bond Dave has 20 years to maturity. If interest rates suddenly rise by 2 percent, what is the percentage change in the price of Bond Sam? Of Bond Dave? If rates were to suddenly fall by 2 percent instead, what would the percentage change in the price of Bond Sam be then? Of Bond Dave? Illustrate your answers by graphing bond prices versus YTM. What does this problem tell you about the interest rate risk of longer-term bonds? 1 Accrued Interest [LO1] You purchase a bond with an invoice price of $1,035. The bond has a coupon rate of 5.9 percent, and there are four months to the next semi-annual coupon date. What is the clean price of the bond? 1 Finding the Bond Maturity [LO1] Shinoda Corp. has 8 percent coupon bonds making annual payments with a YTM of 7.2 percent. The current yield on these bonds is 7.55 percent. How many years do these bonds have left until they mature? 1 Using Bond Quotes [LO1] Suppose the following bond quotes for IOU Corporation appear in the financial page of today's newspaper. Assume the bond has a face value of $2,000 and the current date is April 19, 2015. What is the yield to maturity of the bond? What is the current yield? Company (Ticker) Coupon Maturity Last Price Last Yield EST Vol (000s) IOU (IOU) 5.7 Apr 19, 2028 108.96 ?? 1,827 1 Real Cash Flows [LO2] You want to have $2.6 million in real dollars in an account when you retire in 40 years. The nominal return on your investment is 10.8 percent and the inflation rate is 3.7 percent. What real amount must you deposit each year to achieve your goal