Option 1 You receive 30 annual payments, at the end of each year, with the first...

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Option 1 You receive 30 annual payments, at the end of each year, with the first payment of $6,000 due in exactly one year's time. Every annual payment after the first one increases by r % per year. You reinvest all payments at 5% per annum (effective). Option 2 You receive payments from a 30 year bond of face value $100,000 which is redeemable at par, with coupons of 8% per year payable every six months. The first coupon is due in six months. You reinvest all payments at 4% per annum (effective). In order for both options above to give the same accumulated value after 30 years, what inflation rate r % applies to Option 1 above? Show all working and give your answer to 2 significant figures. (5 marks) Option 1 You receive 30 annual payments, at the end of each year, with the first payment of $6,000 due in exactly one year's time. Every annual payment after the first one increases by r % per year. You reinvest all payments at 5% per annum (effective). Option 2 You receive payments from a 30 year bond of face value $100,000 which is redeemable at par, with coupons of 8% per year payable every six months. The first coupon is due in six months. You reinvest all payments at 4% per annum (effective). In order for both options above to give the same accumulated value after 30 years, what inflation rate r % applies to Option 1 above? Show all working and give your answer to 2 significant figures. (5 marks)

Answer rating: 100% (QA)

To find the inflation rate that would make both options accumulate to the same value after 30 years ... View the full answer