Question

B)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.

Answer 1

Answer:Inflation-linked bonds are a way to protect your investment's principal amount from being eroded by the forces of inflation. Inflation refers to the general ...

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