Question: The federal government issues two four-year notes. The first is a traditional type of debt instrument that pays 6 percent annually ($60 per $1,000 note).

The federal government issues two four-year notes. The first is a traditional type of debt instrument that pays 6 percent annually ($60 per $1,000 note). The second pays a real yield of 3 percent with the amount of interest being adjusted with changes in the CPI. The CPI was 100 when the notes were initially issued.

a) What is the annual amount of interest paid each year on each security if the CPI is as follows?

Year CPI

1 .......102

2 ....... 96

3 .......103

4 .......110

b) What is the amount of principal repaid at maturity by each note?

c) Using the dollar-weighted return explained in Chapter 10, what is the nominal, annual rate of return on each security?

d) Based on the answer to part (c), which alternative produced the higher return and why?

Step by Step Solution

★★★★★

3.35 Rating (167 Votes )

There are 3 Steps involved in it

1 Expert Approved Answer

Step: 1 Unlock

The problem compares the traditional debt instrument with the inflationindexed bond With the traditional bond the interest is the same 60 each year Th... View full answer

Question Has Been Solved by an Expert!

Get step-by-step solutions from verified subject matter experts

Step: 2 Unlock

Step: 3 Unlock

Document Format (1 attachment)

124-B-C-F-I-S (180).docx

120 KBs Word File

Students Have Also Explored These Related Corporate Finance Questions!

You own a 10-year bond that pays 6 percent interest annually. The par value of the bond is $1,100. The bond has a coupon rate of 8 percent, which is paid semiannually. It matures in 7 years and has a...

You own a 10- year bond that pays 6 percent interest annually. The par value of the bond is $ 1,000 and the market price of the bond is $ 900. What is the yield to maturity of the bond?

Yolandas bank advertises a savings investment that pays 6 percent compounded monthly. What is the investments (a) Annual percentage rate (APR) (b) Effective annual rate (rEAR)?

7. The federal government issues two four-year notes. The first is a traditional type of debt instrument that pays 6 percent annually ($60 per $1,000 note). The second pays a real yield of 3 percent...

The federal government issues two four-year notes. The first is a traditional type of debt instrument that pays 6 percent annually ($60 per $1,000 note). The second pays a real yield of 3 percent...

The federal government issues two four-year notes. The first is a traditional type of debt instrument that pays 6 percent annually ($60 per $1000 note). The second pays a real yield of 3 percent with...

The federal government issues two four-year notes. The fi rst is a traditional type of debt instrument that pays 6 percent annually ($60 per $1,000 note). The second pays a real yield of 3 percent...

4 Files 3:17 PM Fri May 13 Insert Draw Layout Review View Unit SMacroeconomic Policy Name: HR: POLICY BASICS Use the space below to take notes during class. The Federal Reserve: Monetary Policy:...

4 Files 3:18 PM Fri May '13 Insert Draw Layout Review View Unit SMacroeconomic Policy Name: HR: FISCAL POLICY Use the space below to take notes during class. Disposable Income: How does a change in...

22Thank you. 1. (60 points) Suppose an industry with inverse market demand P = 300-2Q is comprised of three firms which compete in quantities. Firm 1 is a Stackelberg leader and therefore acts first....

Discuss the advantages and drawbacks of the various recruiting sources.

Uno Company has outstanding 52,000 shares of $10 par value common stock and 25,000 shares of $20 par value preferred stock (8 percent). On December 1, 2011, the board of directors voted an 8 percent...

What is the derivative of the function f ( x ) = xxf ( x ) = xx ? Select one: a . xx 1 xx 1 b . xxlnxxxlnx c . xxxx d . xx ( lnx + 1 )

Explain the circumstances in which it is appropriate or inappropriate to use personnel/cultural, behavioural/action and results/output controls.

Locate and summarize two family law statutes that address the issue of child custody. Provide the title of the code and the section number in your summary. Use Appendix IV to guide you in proper...

Suppose the power series k=0 c k (x 4) k is known to converge at -2 and diverge at 13. Discuss whether the series converges at 7, 0, 7, 10, and 11. Possible answers are does, does not, might.

Give a pseudocode description of an algorithm to find the element with smallest key in a binary search tree. What is the running time of your method?

An employee of the Board of Education is paid an annual salary in 22 bi-weekly payments of $3942.00 each. If the employee is under contract for 200 workdays of 7 1/2 hours each, (a) What is the...

16 Which one of following lists contains only revenue expenditure? a Maintenance of machinery, machine operators wages, replacement of worn part b New computer system, new printer, printer cartridges...

LEW Jewelry Co. uses gold in the manufacture of its products. LEW anticipates that it will need to purchase 500 ounces of gold in October 2012, for jewelry that will be shipped for the holiday...

On November 3, 2012, Sprinkle Co. invested $200,000 in 4,000 shares of the common stock of Pratt Co. Sprinkle classified this investment as available-for-sale. Sprinkle Co. is considering making a...

The financial statements of P&G are presented in Appendix 5B or can be accessed at the books companion website, www.wiley.com/college/kieso. Instructions Refer to P&Gs financial statements and the...

You have found the following stock quote for RJW Enterprises, Incorporated, in the financial pages of today's newspaper. \ table [ [ YTD % Change,Stock,SYM , YLD , PE , Last,Net Change ] , [ - . 8 ,...

Nonconstant Growth Stock Valuation Year 5 , the company sheald grow at a constant rate of 8% per yeat. If the required retum on the stock is 17%, what is the value of the stock today (ascirme the...

Break-Even Analysis Media outlets often have web sites that provide in-depth coverage of news and events. Portions of these web sites are restricted to members who pay a monthly subscription to gain...