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A company has just issued a four year inflation linked bond with a face value of $ 1000. The bond has annual stated real interest rate of 7 % and pays semi-annual coupons. Assume that the YTM on similar nominal bonds is 7%, and that the expected annual inflation rate for the next four year is 2%.
Required:
a. What is the price of the bond at issuance?
b. Suppose that a year after the bond was issued, the YTM on similar nominal bonds remained 7%, however, the expected inflation increased to 5 %. What is the price of the bond now ( one year after it was issued, after the second coupon payment) if the actual inflation in the last year was 8 % ?
c. Two years after the bond was issued, the YTM on similar nominal bonds increased to 9% and the expected inflation remained stable 5 %. What is the current price of the bond if the actual inflation in the last year was 6% (remember, the actual inflation in the previous year was 8 % )
Finance is about Gunns Ltd, a company in dealing with forestry products in Australia. The company has also been listed in Australian Stock Exchange. As many companies producing forestry products, even Gunns Ltd is facing various problems. Due to the ..
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