with inflation rates. may i please have your reply in formula version not excel. thanks:) You have just received an inheritance of $20,000. You wish to invest in fixed income securities such as bonds, which you think are less risky than stocks. After some research, you have narrowed down your choices to the following three fixed income securities: One-year Treasury Bill: Face value of $1000 Yield to maturity of 1.74% Coupon Bond A: Two years to maturity Face value of $1000 Coupon rate of 3%, with semi-annual coupon payments Price multiple of face value = 1.0189 Coupon Bond B: Five years to maturity Face value of $1000 Coupon rate of 3.5%, with annual coupon payments Yield to maturity of 2.51% All yields to maturity are compounded semi-annually.           Adjusting real interest rate for inflation: (1 + real yield) = (1 + nominal yield) / (1 + inflation rate)   One Year Treasury Bill: 1 + real yield = 1.0174 / 1.015 1 + real yield = 1.002365 Real yield = 1.002365 – 1 = .2365%   Coupon Bond A. 1 + real yield = 1.0203 / 1.015 Real yield = .5221%   Coupon Bond B. 1+ real yield = 1.0251/1.015 Real yield = .9951%                                                                                                                  e. If your personal real hurdle rate (the minimum rate of return required on investments) is 1%, which of the three fixed income securities would you choose to invest in?

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
icon
Related questions
Question
100%

A2 8e

with inflation rates. may i please have your reply in formula version not excel. thanks:)

You have just received an inheritance of $20,000. You wish to invest in fixed income securities such as bonds, which you think are less risky than stocks. After some research, you have narrowed down your choices to the following three fixed income securities:

One-year Treasury Bill:

Face value of $1000
Yield to maturity of 1.74%

Coupon Bond A:

Two years to maturity
Face value of $1000
Coupon rate of 3%, with semi-annual coupon payments
Price multiple of face value = 1.0189

Coupon Bond B:

Five years to maturity
Face value of $1000
Coupon rate of 3.5%, with annual coupon payments
Yield to maturity of 2.51%

All yields to maturity are compounded semi-annually.

         

Adjusting real interest rate for inflation:

(1 + real yield) = (1 + nominal yield) / (1 + inflation rate)

 

One Year Treasury Bill:

1 + real yield = 1.0174 / 1.015

1 + real yield = 1.002365

Real yield = 1.002365 – 1 = .2365%

 

Coupon Bond A.

1 + real yield = 1.0203 / 1.015

Real yield = .5221%

 

Coupon Bond B.

1+ real yield = 1.0251/1.015

Real yield = .9951%

                                                                                                                

e. If your personal real hurdle rate (the minimum rate of return required on investments) is 1%, which of the three fixed income securities would you choose to invest in?

Expert Solution
steps

Step by step

Solved in 2 steps

Blurred answer
Knowledge Booster
Foreign Exchange Market
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.
Similar questions
Recommended textbooks for you
Essentials Of Investments
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
FUNDAMENTALS OF CORPORATE FINANCE
FUNDAMENTALS OF CORPORATE FINANCE
Finance
ISBN:
9781260013962
Author:
BREALEY
Publisher:
RENT MCG
Financial Management: Theory & Practice
Financial Management: Theory & Practice
Finance
ISBN:
9781337909730
Author:
Brigham
Publisher:
Cengage
Foundations Of Finance
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education