During a period of severe inflation, a bond offered a nominal HPR of 80% per year. The inflation rate was 70% per year.a. What was the real HPR on the bond over the year?b. Compare this real HPR to the approximation rreal ≈ rnom − i.

During a period of severe inflation, a bond offered a nominal HPR of 80% per year. The inflation rate was 70% per year.a. What was the real HPR on the bond over the year?b. Compare this real HPR to the approximation rreal ≈ rnom − i.

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter4: Bond Valuation

Section: Chapter Questions

Problem 4MC

See similar textbooks

Related questions

Q: What is the price of the following quarterly bond? years face value: maturity: coupon rate: discount…

Q: The real risk-free rate of interest, r*, is 4 percent, and it is expected to remain constant over…

A: A Bond refers to an instrument that represents the loan being made by the investor to the company…

Q: Assume that a bond will make payments every six months as shown on the following timeline (using…

A: Answer - Calculation of Maturity of the Bond (in years) - Payment is made in every 6…

Q: A bond with annual coupon payments has a coupon rate of 8%, yield to maturity of 10%, and Macaulay…

A: Modified duration of bond can be calculated by using this equation Modified duration =Macaulay…

Q: The real risk-free rate, r*, is 4.5%, and it is expected to remain constant over time. Inflation is…

A: The question is based on the concept to calculate the interest rate of a bond based on risk premium.…

Q: A 10-year bond pays an annual coupon, its YTM is 10%, and it currently trades at a par value. Which…

A: YTM is 10% The bond is trading at par means the price of the bond is the same as the face value of…

Q: Suppose a bond is priced at $1108, has 18 years remaining until maturity, and has a 8% coupon, paid…

A: Coupons are paid on bonds periodically according to stated interest rate on the bonds and frequency…

Q: The current rate of inflation is 3 percent, and long-term Treasury bonds are yielding 7 percent. You…

A: Due to the increase in the inflation rate the required rate of return also increase in the same…

Q: Given the interest rate component information below, determine the yield on a 5 year, A-rated bond.…

A: Since you have asked multiple question, we will solve the first question for you. If you want any…

Q: Suppose a ten-year, $1,000 bond with an 8.8% coupon rate and semiannual coupons is trading for…

A: Here, Par value of bond (FV) is $ 1000 Coupon rate is 8.8% Semi annual coupon amount (PMT)is:…

Q: There is a freshly issued 10 year inflation-linked bond with a face value of $1,000. Inflation in…

A: In case of Zero coupon bond no coupon shall be paid during the life of the bond. Therefore,…

Q: he real risk-free rate (r*) is 2.8% and is expected to remain constant. Inflation is expected to be…

A: We can find the yield of a corporate bond can be found from real risk free rate and adding…

Q: Suppose a 10-year, $1,000 bond with an 8.4% coupon rate and semi-annual coupons is trading for a…

A: The bond's yield to maturity is the interest rate at which, when the future benefits to be received…

Q: Assume that A six-year bond with a yield of 10% (continuously compounded) pays an 8% coupon at the…

A: The bond valuation refers to the determination of the bond price, yield to maturity, bond duration,…

Q: For the following questions, assume the normal case that coupon payments are semi-annual. a. What is…

A: Here, Face Value of Bond is $1,000 Selling Price of Bond is $1,000 Coupon Rate is 5.9% Therefore,…

Q: Suppose a 10-year, $1,000 bond with an 8.4% coupon rate and semi-annual coupons is trading for a…

A: Yield to Maturity: The yield to maturity (YTM) is the expected return till the bond matures. In…

Q: What is the price of the bond at 3 different points in time - today, in 1 year, and in 2 years. Is…

A: Bond valuation refers to a method which is used to compute the current value or present value (PV)…

Q: A bond has a 25-year maturity, an 8% annual coupon paidsemiannually, and a face value of $1,000. The…

Q: Suppose the inflation rate is expected to be 6.15% next year, 4% the following year, and 2%…

A: “Since you have posted a question with multiple sub-parts, we will solve first three subparts for…

Q: The real risk-free rate (r*) is 2.80% and is expected to remain constant into the future. Inflation…

A: Given information: Real risk free rate is 2.80% Inflation is expected to be 4.05% for next three…

Q: Assume that a bond will make payments every six months as shown on the following timeline (using…

A: Assuming that the bond has been issued and is being redeemed at par itself. Coupon rate is the rate…

Q: A bond quotes a rate of return of 5% and will pay $1,000 in one year with a probability of 42% and…

A: Time value of money- It is based on the concept that money earned today is worth more than similar…

Q: The yield on a 10-year bond is 7%. The 30-day T-bill yield is 2.5%, while the inflation rate is…

A: Here, Yield on 10 year Bond is 7% T-Bill yield is 2.5% Inflation Rate is 2.3%

Q: The following securities are available for an investor: Quoted Rate 2% 6% 9% 12% Treasury Bill,…

A: Default risk premium The quoted nominal rate is expressed in terms of real risk free rate (RRR),…

Q: Suppose the inflation rate is expected to be 7% next year, 5% the followingyear, and 3% thereafter.…

A: r = r*+IP+MRP Here, The interest rate is r. The real risk free rate is r*. The inflation rate is IP.…

Q: A bond pays $10,000 per year for the next 10 years. The bond costs $90,000 now. Inflation is…

A: Given, Bond pays 10,000 / year for 10 years. Cost of bond = $90,000 Inflation = 6% for 10 years

Q: For the following questions, assume the normal case that coupon payments are semi-annual. a. What is…

A: Face Value of Bond = 1000 Time Period of Bond = N = 10 years Bond Price = 1000 Coupon Rate = 5.3%…

Q: Bond Durations: (A) Compute the duration and modified duration of a 7-year bond that makes annual…

A: Duration of bond states the sensitivity of bond price to the change in market interest rate.…

Q: Assume that a bond will make payments every six months as shown on the following timeline (using…

A: Number of semi annual periods = 40 Semi annual coupon payment = $19.03 Par value = $1000

Q: What is the price of the following semi-annual bond? face value: maturity: years coupon rate:…

A: The price or value of a bond is calculated as the sum of present value of interest payments and the…

Q: A bond with a face value of $1,000 has 10 years until maturity, carries a coupon rate of 9%, and…

A: Yield to maturity (YTM) is the effective rate of return or the current yield that is expected to be…

Q: A bond that matures in 20 years has a $1000 par value .The annual coupon interest rate is 14% and…

A: Coupon rate per period (14%/2) 7.00% Face value of the bond $ 1,000 Market…

Q: For the following questions, assume the normal case that coupon payments are semi-annual. a. What is…

A: For annual rate of return from bond, first we need to use PV function in excel to calculate bond…

Q: A bond, paying semi-annual coupons of 4% per annum, matures in 18 months time, and has a dirty price…

A: The overall rate of return given by a bond is referred to as its yield to maturity. It is the rate…

Q: A bond has an annual 8 percent coupon rate, a maturity of 10 years, a face value of $1,000, and…

A: The formula to calculate price of bond is given below,

Q: What is the coupon rate for the bond? Assume semi-annual payments. Answer as a percent! Bond Coupon…

Q: A bond with a face value of $1,000 has 10 years until maturity, carries a coupon rate of 9%, and…

A: FV = $1,000 Coupon Rate = 9% N = 10-1 = 9 YTM = 9% Using Financial Calculator : PV = $1,000.

Q: During a period of severe inflation, a bond offered a nominal HPR of 86% per year. The inflation…

A: a) Real HPR = [(1+nominal HPR) / (1+inflation rate)] -1

Q: The real risk-free rate (r*) is 2.8% and is expected to remain constant. Inflation is expected to be…

A: Given: Real risk free rate = 2.8% Inflation rate for 3 years = 7% Inflation after 3 years = 6%…

Q: What is the value of the following semi-annual bond? years face value: maturity: coupon rate:…

A: Present value of bond is calculated with the help of NPV method of capital budgeting techniques.…

Q: A bond that matures in13years has a$1,000par value. The annual coupon interest rate is8percent and…

A: Price / Present Value can be calculated using PV function in excel PV (rate, nper, pmt, [Fv],…

Q: what would be the predicted new bond price according to duration?

A: Bond valuation refers to a method which is used to compute the current value or present value (PV)…

Q: A bond a has a par value of P100, a coupon rate of 10.75% and matures in 5 years. If interest is…

A: Bonds Bonds refer to the fixed income instrument that is issued by the corporations or government in…

Concept explainers

Treasury Market

On-the-run securities are the most recently issued securities in the market depth and are therefore traded at some premium. The off-the-run securities are the ones issued just before the most recent ones. The on-the-run securities have a lower yield to the investor than the off-the-run securities.

Question

During a period of severe inflation, a bond offered a nominal HPR of 80% per year. The inflation rate was 70% per year.
a. What was the real HPR on the bond over the year?
b. Compare this real HPR to the approximation r_real ≈ r_nom − i.

Expert Solution

This question has been solved!

Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.

This is a popular solution!

SEE SOLUTION Check out a sample Q&A here

Step 1

Step 2

Step 3

Step 4

Step 5

Step 6

Trending now

This is a popular solution!

Step by step

Solved in 6 steps with 3 images

SEE SOLUTION Check out a sample Q&A here

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.

Similar questions

What would be the value of the bond described in Part d if, just after it had been issued, the expected inflation rate rose by 3 percentage points, causing investors to require a 13% return? Would we now have a discount or a premium bond? What would happen to the bond’s value if inflation fell and rd declined to 7%? Would we now have a premium or a discount bond? What would happen to the value of the 10-year bond over time if the required rate of return remained at 13%? If it remained at 7%? (Hint: With a financial calculator, enter PMT, I/YR, FV, and N, and then change N to see what happens to the PV as the bond approaches maturity.)
Suppose a 10-year, 10% semiannual coupon bond with a par value of 1,000 is currently selling for 1,135.90, producing a nominal yield to maturity of 8%. However, the bond can be called after 5 years for a price of 1,050. (1) What is the bonds nominal yield to call (YTC)? (2) If you bought this bond, do you think you would be more likely to earn the YTM or the YTC? Why?
Interest Rate Sensitivity A bond trader purchased each of the following bonds at a yield to maturity of 8%. Immediately after she purchased the bonds, interest rates fell to 7%. What is the percentage change in the price of each bond after the decline in interest rates? Assume annual coupons and annual compounding. Fill in the following table:
Current Yield with Semiannual Payments A bond that matures in 7 years sells for $1,020. The bond has a face value of $1,000 and a yield to maturity of 10.5883%. The bond pays coupons semiannually. What is the bond’s current yield?
Bond Yields and Rates of Return A 10-year, 12% semiannual coupon bond with a par value of 1,000 may be called in 4 years at a call price of 1,060. The bond sells for 1,100. (Assume that the bond has just been issued.) a. What is the bonds yield to maturity? b. What is the bonds current yield? c. What is the bonds capital gain or loss yield? d. What is the bonds yield to call?