The federal government issues two four-year notes. The first is a traditional type of debt instrument that
Question:
The federal government issues two four-year notes. The first is a traditional type of debt instrument that pays 6 percent annually ($60 per $1,000 note). The second pays a real yield of 3 percent with the amount of interest being adjusted with changes in the CPI. The CPI was 100 when the notes were initially issued.
a) What is the annual amount of interest paid each year on each security if the CPI is as follows?
Year CPI
1 .......102
2 ....... 96
3 .......103
4 .......110
b) What is the amount of principal repaid at maturity by each note?
c) Using the dollar-weighted return explained in Chapter 10, what is the nominal, annual rate of return on each security?
d) Based on the answer to part (c), which alternative produced the higher return and why?
Maturity is the date on which the life of a transaction or financial instrument ends, after which it must either be renewed, or it will cease to exist. The term is commonly used for deposits, foreign exchange spot, and forward transactions, interest...
Step by Step Answer:
The problem compares the traditional debt instrument with the inflationindexed bond With the traditional bond the interest is the same 60 each year Th...View the full answer
