An investor, who is liable to income tax at a rate of 25%, purchases on 1st July 2019 £15,000 nominal of an index-linked bond at the issue price of £115 per £100 nominal. The bond is redeemable at 112% in exactly two years' time and pays half-yearly coupons in arrears at a rate of 6% per annum. Coupons and redemption proceeds are indexed by reference to the retail price index with a 6-months lag. The value of the retail price index over the given two- year period was as follows: (i) (ii) Month/Year January July 2019 155.2 163.4 2020 170.9 175.2 2021 182.6 187.5 Explain briefly why it is necessary in practice to index payments under an index-linked bond using a time lag. Calculate all the investor's cash flows from the bond and state the date when each occurred. (iii) Based on the cash flows determined in part (ii), calculate to the nearest 0.1% the annual net redemption yield achieved by the investor on this investment.
An investor, who is liable to income tax at a rate of 25%, purchases on 1st July 2019 £15,000 nominal of an index-linked bond at the issue price of £115 per £100 nominal. The bond is redeemable at 112% in exactly two years' time and pays half-yearly coupons in arrears at a rate of 6% per annum. Coupons and redemption proceeds are indexed by reference to the retail price index with a 6-months lag. The value of the retail price index over the given two- year period was as follows: (i) (ii) Month/Year January July 2019 155.2 163.4 2020 170.9 175.2 2021 182.6 187.5 Explain briefly why it is necessary in practice to index payments under an index-linked bond using a time lag. Calculate all the investor's cash flows from the bond and state the date when each occurred. (iii) Based on the cash flows determined in part (ii), calculate to the nearest 0.1% the annual net redemption yield achieved by the investor on this investment.
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
Related questions
Question
calculate using formulas, no tables:
correct answers:
ii)
On 1/sep/2017 = -5,500
On 1/Mar/2018 = 102.92
On 1/Sept/2018 = 106.0
On 1/Mar/2019 = 108.0
On 1/Sep/2019 = 110.0 + 6,325.0 = 6,435.0
iii)
let
Transcribed Image Text:An investor, who is liable to income tax at a rate of 25%, purchases on 1st July 2019 £15,000
nominal of an index-linked bond at the issue price of £115 per £100 nominal. The bond is
redeemable at 112% in exactly two years' time and pays half-yearly coupons in arrears at a
rate of 6% per annum. Coupons and redemption proceeds are indexed by reference to the
retail price index with a 6-months lag. The value of the retail price index over the given two-
year period was as follows:
(i)
(ii)
Month/Year
January
July
2019
155.2
163.4
2020
170.9
175.2
2021
182.6
187.5
Explain briefly why it is necessary in practice to index payments under an index-linked
bond using a time lag.
Calculate all the investor's cash flows from the bond and state the date when each
occurred.
(iii) Based on the cash flows determined in part (ii), calculate to the nearest 0.1% the
annual net redemption yield achieved by the investor on this investment.
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