An investor, who is liable to income tax at a rate of 25%, purchases on 1st July 2019 £15,000 nominal of an index-linked bond at the issue price of £115 per £100 nominal. The bond is redeemable at 112% in exactly two years' time and pays half-yearly coupons in arrears at a rate of 6% per annum. Coupons and redemption proceeds are indexed by reference to the retail price index with a 6-months lag. The value of the retail price index over the given two- year period was as follows: Month/Year 2019 2020 2021 January 155.2 170.9 182.6 July 163.4 175.2 187.5 (i) Explain briefly why it is necessary in practice to index payments under an index-linked bond using a time lag. (ii) Calculate all the investor's cash flows from the bond and state the date when each occurred. (iii) Based on the cash flows determined in part (ii), calculate to the nearest 0.1% the annual net redemption yield achieved by the investor on this investment.

Solve it using formulas, no tables

correct answers are:

i) i1= 0.08225 pa

   i2= 0.08362 pa

   i3= 0.10067 pa

ii) f(2,1) = 0.13558 pa

iii) i(c3) = 0.09901 pa