5-18. Suppose today is January 2, 2022, and investors expect the annual inflation rates in 2022 through2024 to be:Year202220232024One-Year Inflation Rate2.1%1.50.9To yield a real risk-free rate, r*, equal to 2 percent, what would the average nominal rate be on a(a) one-year bond,(b) two-year bond, and(c) three-year bond?

The real interest rate has been given in the question which is 2% The nominal interest rate is the…

Answered: To yield a real risk-free rate, r*,…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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The price of a bond is the present value of the remaining interest payments plus the future value of the redemption amount the present value of the redemption amount 8 the face value 11 the current yield
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The value of any financial asset is the present ✓ value of the cash flows the asset is expected to produce. For a bond with fixed annual coupons, its value is equal to the present value of all its annual interest payments and its maturity value as shown in the equation below: Bond's value = VB: Int. Int. (1+ra)² (1+ra)² N + ·+...+ Int. M + (1+ra)* (1+ra) Int. M (1+ra) (1+ra)N + We could use the valuation equation shown above to solve for a bond's value; however, it is more efficient to use a financial calculator. Simply enter N as years to maturity, I/YR as the going annual interest rate, PMT as the annual coupon payment (calculated as the annual coupon interest rate times the face value of the bond), and FV as the stated maturity value. Once those inputs are entered in your financial calculator, you can solve for PV, the value of the bond. Remember that the signs for PMT and FV should be the same, so PV will have an opposite sign. Typically, you would enter PMT and FV as positive…

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To yield a real risk-free rate, r*, equal to 2 percent, what would the average nominal rate be on a (a) one-year bond, (b) two-year bond, and (c) three-year bond?