You want to invest in a bond for one year, and are deciding between the following two choices - Bond A and Bond B, both of which have a maturity of 1 year and a par value of $1,000.Bond A is a regular(i.e., nominal- return) with a couponrate of 3% per year, payable semi-annually. The current price of Bond A is $998. Bond B is a real-return bond with a coupon rate of 2% per year, payable annually. The current price of Bond B is $1,000. What is the inflation rate (over the next year) that will make the (nominal) ratesof return of the two choices the same?
You want to invest in a bond for one year, and are deciding between the following two choices - Bond A and Bond B, both of which have a maturity of 1 year and a par value of $1,000.Bond A is a regular(i.e., nominal- return) with a couponrate of 3% per year, payable semi-annually. The current price of Bond A is $998. Bond B is a real-return bond with a coupon rate of 2% per year, payable annually. The current price of Bond B is $1,000. What is the inflation rate (over the next year) that will make the (nominal) ratesof return of the two choices the same?
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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Transcribed Image Text:You want to invest in a bond for one year, and are deciding between the following two choices - Bond A and
Bond B, both of which have a maturity of 1 year and a par value of $1,000.Bond A is a regular(i.e., nominal-
return) with a couponrate of 3% per year, payable semi-annually. The current price of Bond A is $998. Bond B
is a real-return bond with a coupon rate of 2% per year, payable annually. The current price of Bond B is
$1,000. What is the inflation rate (over the next year) that will make the (nominal) ratesof return of the two
choices the same?
Expert Solution
Step 1: Information required for calculation:
- Par value of both bonds= $1,000
- Coupon rate of bond A=3%
- Coupon rate of bond B = 2%
- Years to maturity for both bonds=1 year
- Current price of bond A= $998
- Current price of bond B= $1,000
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