Question 2 Last year, you earned a rate of return of 8.16 percent on your bond i
ID: 2758976 • Letter: Q
Question
Question 2
Last year, you earned a rate of return of 8.16 percent on your bond investments. During that time, the inflation rate was 2.89 percent. What was your real rate of return?
Use the exact relationship between real and nominal rates. Enter answer in percents, accurate to two decimal places.
Question 3
GDebi, Inc. plans to issue 6.1 percent coupon bonds, with annual coupon frequency, 17 years to maturity and $1000 face value. If the prevailing market yield on bonds of similar riskiness and maturity is 8.2 percent, what would be the market price of GDebi's bonds?
Question 4
HexChat, Inc. has issued 16 year bonds 5 years ago. The bonds pay semiannual coupons, with a coupon rate of 3.3 percent, and $1000 face value. If your required return on this investment is 7.1 percent APR, how much would you be willing to pay for this bond?
Explanation / Answer
Q2 Nominal Return =8.16% Inflation Rate =2.89% By Fisher Equation: (1+Nominal rate)=(1+Real Rate)*(1+Inflation) 1.0816=(1+Real Rate )*1.0289 Real Rate =5.12% Q3 Bond Par Value 1,000 Annual Interest 61 Years To maturity 17 YTM of similar Bond = 8.20% Bond Price Calculation Year Coupon+MAturity PV factor @8.2% PV of Cash Flows Year 1 61 0.924 56.38 Year 2 61 0.854 52.10 Year 3 61 0.789 48.16 Year 4 61 0.730 44.51 Year 5 61 0.674 41.13 Year 6 61 0.623 38.02 Year 7 61 0.576 35.13 Year 8 61 0.532 32.47 Year 9 61 0.492 30.01 Year 10 61 0.455 27.74 Year 11 61 0.420 25.63 Year 12 61 0.388 23.69 Year 13 61 0.359 21.90 Year 14 61 0.332 20.24 Year 15 61 0.307 18.70 Year 16 61 0.283 17.29 Year 17 1,061 0.262 277.88 $ 810.97 So Market Price of Gdebi's Bond = $ 810.97 HexChat Inc. Q4. Bond Par Value 1,000 Semi Annual Interest @1.65% 16.50 Years To maturity 11 Required Return semi annual= 3.55 % Bond Price Calculation Period Coupon+MAturity PV factor @3.55% PV of Cash Flows Per iod 1 16.50 0.966 15.93 Per iod 2 16.50 0.933 15.39 Per iod 3 16.50 0.901 14.86 Per iod 4 16.50 0.870 14.35 Per iod 5 16.50 0.840 13.86 Per iod 6 16.50 0.811 13.38 Per iod 7 16.50 0.783 12.93 Per iod 8 16.50 0.756 12.48 Per iod 9 16.50 0.731 12.05 Per iod 10 16.50 0.706 11.64 Per iod 11 16.50 0.681 11.24 Per iod 12 16.50 0.658 10.86 Per iod 13 16.50 0.635 10.48 Per iod 14 16.50 0.614 10.12 Per iod 15 16.50 0.593 9.78 Per iod 16 16.50 0.572 9.44 Per iod 17 16.50 0.553 9.12 Per iod 18 16.50 0.534 8.81 Per iod 19 16.50 0.515 8.50 Per iod 20 16.50 0.498 8.21 Per iod 21 16.50 0.481 7.93 Per iod 22 1,016.50 0.464 471.85 Total $ 713.23 So As per my required return I would pay $712.23
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