Question 12.20An index takes the following values:1/1/05: 121.2 1/1/06 123.9 1/1/07 125.21/4/05 122.8 1/4/06 124.2 1/4/07 126.01/7/05 123.1 1/7/06 124.41/10/05 123.6 1/10/06 124.9An index-linked bond is purchased on 1/4/05 (when the remaining term is two years)for a price of Â£101 per Â£100 nominal. The bond is due to be redeemed at par. Allcoupon and redemption payments are linked to the inflation index three months prior tothe payment date. The coupons on the bond are of nominal amount 4% pa payable halfyearlyin arrears on 1st April and October every year.Calculate the real yield obtained by the investor. You may ignore tax.
An investor purchases a bond 3 months after issue. The bond will be redeemed at parten years after issue and pays coupons of 6% per annum annually in arrears. Theinvestor pays tax of 25% on both income and capital gains (with no relief forindexation).(i) Calculate the purchase price of the bond per Â£100 nominal to provide theinvestor with a rate of return of 8% per annum effective. (ii) The real rate of return expected by the investor from the bond is 3% per annumeffective. Calculate the annual rate of inflation expected by the investor.
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