1. Compute the annual interest payments and principal amount for a Treasury Infl

Question

1. Compute the annual interest payments and principal amount for a Treasury Inflation-Protected Security with a par value of $1000 and a 3 percent interest rate if inflation is 4 percent in year one, 5 percent in year two, and 6 percent in year three.

2. The Joseph Company has a stock issue that pays a fixed dividend of $3.00 per share annually. Investors believe the nominal risk-free rate is 4 percent and that this stock should have a risk premium of 6 percent. What should be the value of this stock?

3.

Asset            Income     Price                Initial         Time Period

                                     Change              Price         

A                 $2                           $6                  $29     15 months         

            B                   0                 10                    40               11 months

            C               50                70                    30                 7 years

            D                   3                 -8                     20             24 months

Explanation / Answer

The principal amount moves with inflation or deflation. The corresponding interest payments are then based off the principal amounts.

Par Value : $1000 interest rate = .03

Year One) $1000 x 1.04 = $1040 x .03 = $31.20

Year Two) $1000 x 1.05= $1050 x .03 = $31.50

Year Three) $1000 x 1.06 = $1060 x .03 = $31.80

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