Chapter 14, Problem 18PS

Summary Introduction

(a)

To Discuss:

To return to Table 10.1,showing the cash flows for TIPS Bonds and determine:

The nominal rate of return on the bond in Year 2.

Introduction:

A bond is a security that creates an obligation on the issuer to make specified payments to the holder for a given period of time. The face value of the bond is the amount the holder will receive on maturity along with the coupon rate which is also known as the interest rate of the bond.Treasury Inflation-Protected Securities are also termed as TIPS bonds. These securities offer safety against inflation. The principal amount of the TIPS bonds riseduring inflation and fallduring deflation. The Consumer Price Index is used to measure TIPS bonds.

A coupon payment on a bond is the annual interest payment that the bondholder receives from the bond's issue date until it matures. An increase in the inflation rate will causea fall in the bond prices. A real rate of return describes the annual percentage return from an investment.

It is adjusted for changes in prices caused by inflation or other external effects.The nominal rate of return describes the amount of money from an investment before considering expenses like inflation, taxes and investment fees.

Summary Introduction

(b)

To return to Table 10.1, showing the cash flows for TIPS Bonds and determine:

The real rate of return in Year 2.

Introduction:

A bond is a security that creates an obligation on the issuer to make specified payments to the holder for a given period of time. The face value of the bond is the amount the holder will receive on maturity along with the coupon rate which is also known as the interest rate of the bond.Treasury Inflation-Protected Securities are also termed as TIPS bonds. These securities offer safety against inflation. The principal amount of the TIPS bonds rise during inflation and fall during deflation. The Consumer Price Index is used to measure TIPS bonds.

Coupon payment on a bond- It is defined as the annual interest payment which the bondholder gets from the bond's issue date till the time it matures.

An increase in the inflation rate will cause a fall in the bond prices. A real rate of return describes the annual percentage return from an investment.

It is adjusted for changes in prices caused by inflation or other external effects.The nominal rate of return describes the amount of money from an investment before considering expenses like inflation, taxes and investment fees.

Summary Introduction

(c)

To return to Table 10.1,showing the cash flows for TIPS Bonds and determine:

The nominal rate of return on the bond in Year 3.

Introduction:

A bond is a security that creates an obligation on the issuer to make specified payments to the holder for a given period of time. The face value of the bond is the amount the holder will receive on maturity along with the coupon rate which is also known as the interest rate of the bond. Treasury Inflation-Protected Securities are also termed as TIPS bonds. These securities offer safety against inflation. The principal amount of the TIPS bonds rise during inflation and fall during deflation. The Consumer Price Index is used to measure TIPS bonds.

Coupon payment on a bond- It is defined as the annual interest payment which the bondholder gets from the bond's issue date till the time it matures.

An increase in the inflation rate will cause a fall in the bond prices. A real rate of return describes the annual percentage return from an investment.

It is adjusted for changes in prices caused by inflation or other external effects.The nominal rate of return describes the amount of money from an investment before considering expenses like inflation, taxes and investment fees.

Summary Introduction

(d)

To Discuss:

To return to Table 10.1,showing the cash flows for TIPS Bonds and determine:

The real rate of return in Year 3.

Introduction:

A bond is a security that creates an obligation on the issuer to make specified payments to the holder for a given period of time. The face value of the bond is the amount the holder will receive on maturity along with the coupon rate which is also known as the interest rate of the bond. Treasury Inflation-Protected Securities are also termed as TIPS bonds. These securities offer safety against inflation. The principal amount of the TIPS bonds rise during inflation and fall during deflation. The Consumer Price Index is used to measure TIPS bonds.

Coupon payment on a bond- It is defined as the annual interest payment which the bondholder gets from the bond's issue date till the time it matures.

An increase in the inflation rate will cause a fall in the bond prices. A real rate of return describes the annual percentage return from an investment.

It is adjusted for changes in prices caused by inflation or other external effects. The nominal rate of return describes the amount of money from an investment before considering expenses like inflation, taxes and investment fees.