Question

Ganymedes earned on his bond investments a real rate of return of 5.75 percent for a time period when the inflation rate was 12.79 percent. What was the actual nominal rate of return?

Hector just bought a 5.4 percent $1,000 bond that matures in 15 years, pays interest semiannually, and has a yield to maturity of 6.49 percent. How much dis Hector pay for this bond?

Answer 1

1)
	(1+R)	=	(1+r)*(1+i)			Where,
	(1+R)	=	(1+0.0575)*(1+0.1279)			R	Nominal rate	?
	(1+R)	=	1.19275425			r	Real rate	5.75%
	R	=	0.19275425			i	inflation rate	12.79%
	Thus, Nominal rate is		19.28%
2)	Price	$ 896.48
Working:
1)	Semi annual coupon			=	$ 1,000	x	5.4%/2	=	$    27.00
2)	Semi annual yield			=	6.49%	/	2	=	3.245%
3)	Present value of annuity of 1			=	(1-(1+i)^-n)/i		Where,
				=	(1-(1+0.03245)^-30)/0.03245		i	3.245%
				=	18.9940		n	30
4)	Present Value of 1 to be received at maturity			=	1+i)^-n
				=	(1+0.03245)^-30
				=	0.3836
5)	Present Value of coupon payment			=	$                               27.00	x	18.994	=	$ 512.84
	Present Value of Par Value			=	$                         1,000.00	x	0.384	=	$ 383.64
	Present value of total cash flows from bond								$ 896.48
6)	Price of bond is the Present value of cash flows from bond.So, Price of bond is					$            896.48