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umka21 [38]
3 years ago
13

Suppose that you buy a TIPS (inflation-indexed) bond with a 1-year maturity and a coupon of 7% paid annually. Assume you buy the

bond at its face value of $1,000, and the inflation rate is 8%.
(a) What will be your cash flow at the end of the year?
(b) What will be your real return?
(c) What will be your nominal return?
Business
1 answer:
Kryger [21]3 years ago
7 0

Answer:

at maturity I will receive 1,155.6

the real return is 7%

the nominal will be 15.56%

Explanation:

As it is indexed it will paid a real rate of 7% adjusted for 8% inflation

1,000(1+r)(1+\delta)=Amount

1,000 x 1.07 x 1.08 = 1,155.6 received at maturity

no know the nominal rate we do:

\frac{Amount}{Principal}-1

\frac{1,155.6}{1,000}-1

nominal = 0.1556 = 15.56%

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The money that has been set aside for emergency situations can be ideally used for paying the phone bill at first.

Option C is the correct answer.

<h3>What is an emergency fund?</h3>

An emergency fund is an amount that is kept by an individual out of their earned income which is further to be used in uncertain times.

An emergency fund has been created to meet the contingencies in life that can be in the form of repairs of any equipment, medical problems, loss of job, etc. This fund helps the individual in uncertain times when he/she is in need of funds.

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Answer:

The item is identifiable and lacks physical substance.

Explanation:

Intangible asset: Intangible asset is that asset which cannot be seen or even touched. It has no physical existence.

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C. Less than the variance of each asset, except when the two assets are perfectly positively correlated.

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