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You're given two investment options: Bond X : A regular 2-year bond with a coupon rate of 4% per year, payable semi-annually. Its current price
You're given two investment options:
Bond X: A regular 2-year bond with a coupon rate of 4% per year, payable semi-annually. Its current price is $975. Bond Y: A 2-year real-return bond with a coupon rate of 3% per year, payable annually. Its current price is $980.
What is the average annual inflation rate over the next 2 years that would make the nominal rates of return of the two choices the same?
Use continuous compounding only
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