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. d. If the inflation rate is 1.5%, what are the real yields on the one-year treasury bill, Coupon Bond A, and Coupon Bond B?
A2 8 d
8. 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
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.
d. If the inflation rate is 1.5%, what are the real yields on the one-year treasury bill, Coupon Bond A, and Coupon Bond B?
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