(a)You wish to obtain an annual rate of return of 12% from a bond Investment. Yo

Question

(a)You wish to obtain an annual rate of return of 12% from a bond Investment. You will buy a bond with PAR value 10.000 and bond rate of return of 6% compounded semiannually. You hold it for three years exactly and then sell it for 10,500. What is the maximum purchase price you can afford to reach your rate of return goal? (b) Independent of part (a). You have an investment that returns 12% per year. After careful study you notice that your purchasing power has only increased 8% per year. This you attribute to inflation. What is the governing equation for this situation and what is the inflation rate?

Explanation / Answer

3) Semi annual income = 10000*3% = 300

PV of Bond = PV of selling + PV of coupon payments = 10500/(1.12)^3 + 300/1.06 + 300/1.06^2 +.... + 300/1.06^6 = 8948.89

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