Suppose now that there were two errors in the inflation information provided in part (i). The inflation index at 1 July 2020 should have been 101 rather than 97, and the inflation index at 1 January 2021 should have been 101 rather than 91. With the updated and correct inflation information, would this increase, decrease, or have no change upon your answer to (i) above? Describe why (in words) you have chosen the impact to be an in increase, decrease, or no change. [3 marks]

 

Suppose that the following information relating to inflation applies: Date Inflation index 1-January-2020 101 1-July-2020 97 1-January-2021 91 1-July-2021 101 1-January-2022 110 Consider a 2-year bond of face value $1,000, paying semi-annual coupons of 4% per annum (all coupon payments are level, i.e. no coupons from this bond are linked to inflation). The bond is redeemable at par, no tax applies, and the next coupon is due in 6 months time. The current date is 1 January 2020.