Question

g You currently hold an inflation-indexed bond, which pays out real coupons of 10% per year, starting one year from now. The bond has a real face value of $600, and will mature three years from today. If inflation over the next year will be 2% per year for the next three years, what will be the total nominal payment you will receive at the date of maturity

Answer 1

Answer:

$618 dollars

Explanation:

The beginning face value will be our starting position: $600

Then, we have a 2 percent increase over the next three years

this makes for a principal at maturity of:

600 x (1 + 2% x 3 years ) = $618

This makes each coupon return in coins to also increase over time as, they are calcualted based on the adjusted face vale. This method iguarantee the 10% return on the bond regardless of inflation during the period.