index-linked bond, statistics homework help

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index-linked bond, statistics homework help

Question 12.20
An index takes the following values:
1/1/05: 121.2 1/1/06 123.9 1/1/07 125.2
1/4/05 122.8 1/4/06 124.2 1/4/07 126.0
1/7/05 123.1 1/7/06 124.4
1/10/05 123.6 1/10/06 124.9
An index-linked bond is purchased on 1/4/05 (when the remaining term is two years)
for a price of £101 per £100 nominal. The bond is due to be redeemed at par. All
coupon and redemption payments are linked to the inflation index three months prior to
the payment date. The coupons on the bond are of nominal amount 4% pa payable halfyearly
in arrears on 1st April and October every year.
Calculate the real yield obtained by the investor. You may ignore tax.

Question 2

An investor purchases a bond 3 months after issue. The bond will be redeemed at par
ten years after issue and pays coupons of 6% per annum annually in arrears. The
investor pays tax of 25% on both income and capital gains (with no relief for
indexation).
(i) Calculate the purchase price of the bond per £100 nominal to provide the
investor with a rate of return of 8% per annum effective. [6]
(ii) The real rate of return expected by the investor from the bond is 3% per annum
effective. Calculate the annual rate of inflation expected by the investor.