A bank has issued a bond on April 1st 2020 which pays coupons at a rate of 3% of the nominal value twice a year in arrears. Coupon payments are due on 1st April and 1st October and the bond is redeemable at 110% of nominal on Ist September 2030. (a) An investor purchases the bond on 1st March 2021. Show that the price of the bond is approximately £76 per £100 nominal assuming a gross redemption yield of 7%. (b) The investor pays income tax at 40%. In addition, assume that the inflation rate is constant at 1.5%. Calculate the investor's net real rate of return assuming she holds the bond until maturity. State any approximations made.

A bank has issued a bond on April 1st 2020 which pays coupons at a rate of 3% of the nominal value twice a year in arrears. Coupon payments are due on 1st April and 1st October and the bond is redeemable at 110% of nominal on Ist September 2030. (a) An investor purchases the bond on 1st March 2021. Show that the price of the bond is approximately £76 per £100 nominal assuming a gross redemption yield of 7%. (b) The investor pays income tax at 40%. In addition, assume that the inflation rate is constant at 1.5%. Calculate the investor's net real rate of return assuming she holds the bond until maturity. State any approximations made.

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

Problem 1PS

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h

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