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A 3-Year fixed interest bond pays a coupon of 5% p.a., yearly in arrears and is redeemed at par. An investor purchases the 100 nominal of the bond at 95. (1) Compute the effective annual rate. (2) If the value of the inflation index (I) over 3 years has the following behaviour: I(t = 1) = 104. I(t = 2) = 108.16 and I(t = 3) = 112.49

A 3-Year fixed interest bond pays a coupon of 5% p.a., yearly in arrears and is redeemed at par. An investor purchases the 100 nominal of the bond at 95. (1) Compute the effective annual rate. (2) If the value of the inflation index (I) over 3 years has the following behaviour: I(t = 1) = 104. I(t = 2) = 108.16 and I(t = 3) = 112.49

Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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A 3-Year fixed interest bond pays a coupon of 5% p.a., yearly in arrears and is redeemed at par. An investor purchases the 100 nominal of the bond at 95. (1) Compute the effective annual rate. (2) If the value of the inflation index (I) over 3 years has the following behaviour: I(t = 1) = 104, I(t = 2) = 108.16 and I(t = 3) = 112.49 calculate the annual real rate of the bond. (3) Compute the accumulated value at T = 5Y of the cash flows col- lected from the bond. Use as reference rate of the investement the effective annual rate previously estimated.
Transcribed Image Text:A 3-Year fixed interest bond pays a coupon of 5% p.a., yearly in arrears and is redeemed at par. An investor purchases the 100 nominal of the bond at 95. (1) Compute the effective annual rate. (2) If the value of the inflation index (I) over 3 years has the following behaviour: I(t = 1) = 104, I(t = 2) = 108.16 and I(t = 3) = 112.49 calculate the annual real rate of the bond. (3) Compute the accumulated value at T = 5Y of the cash flows col- lected from the bond. Use as reference rate of the investement the effective annual rate previously estimated.
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