A company has issued five-year bonds with the annual coupon and the repayment of principal linked to an index of inflation. The coupon rate is 4.75% and the principal is £100. The index of inflation is currently set at 100. Assume annual inflation rates for the next five years in the table below. Inflation RateYear 1Year 2Year 3Year 4Year 50.88%1.47%2.68%3.28%4.50% Calculate the level of the inflation index for each year and use it to determine the coupon payment per bond for each of the five years. In addition, calculate the amount that the company pays bondholders when the debt matures after five years. Your mathematical workings should be clearly outlined in your written presentation.

Given, Base inflation index = 100 Face value (principal) = £100 Coupon rate = 4.75% A) The inflation…

Answered: A company has issued five-year bonds…

ECON MACRO

5th Edition

ISBN:9781337000529

Author:William A. McEachern

Publisher:William A. McEachern

Chapter7: Unemployment And Inflation

Section: Chapter Questions

Problem 3.7P

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A company has issued five-year bonds with the annual coupon and the repayment of principal linked to an index of inflation. The coupon rate is 4.75% and the principal is £100. The index of inflation is currently set at 100. Assume annual inflation rates for the next five years in the table below.

Inflation Rate
Year 1	Year 2	Year 3	Year 4	Year 5
0.88%	1.47%	2.68%	3.28%	4.50%

Calculate the level of the inflation index for each year and use it to determine the coupon payment per bond for each of the five years. In addition, calculate the amount that the company pays bondholders when the debt matures after five years. Your mathematical workings should be clearly outlined in your written presentation.

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