Solve it using formulas, no tables correct answers are: ii) on 01/07/2019 --> -£17,250 On 01/01/2020 --> £355.33 On 01/07/2020 --> £371.64 On 01/01/2021 --> £380.99 On 01/07/2021 --> 397.08+ 19,765.98 = £20,163.06 iii) using annual t.u. NPV(i%) = 0 --> starting value i'= 11% pa --> NPV(11%)= 112.6585 and NPV(12%)=-187.1173 therefore i≈ 11.3758≈ 11.4% pa 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: (i) (ii) Month/Year 2019 2020 2021 January 155.2 170.9 182.6 July 163.4 175.2 187.5 Explain briefly why it is necessary in practice to index payments under an index-linked bond using a time lag. 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: ii) on 01/07/2019 --> -£17,250 On 01/01/2020 --> £355.33 On 01/07/2020 --> £371.64 On 01/01/2021 --> £380.99 On 01/07/2021 --> 397.08+ 19,765.98 = £20,163.06 iii) using annual t.u. NPV(i%) = 0 --> starting value i'= 11% pa --> NPV(11%)= 112.6585 and NPV(12%)=-187.1173 therefore i≈ 11.3758≈ 11.4% pa 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: (i) (ii) Month/Year 2019 2020 2021 January 155.2 170.9 182.6 July 163.4 175.2 187.5 Explain briefly why it is necessary in practice to index payments under an index-linked bond using a time lag. 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.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:Solve it using formulas, no tables
correct answers are:
ii) on 01/07/2019 --> -£17,250
On 01/01/2020 --> £355.33
On 01/07/2020 --> £371.64
On 01/01/2021 --> £380.99
On 01/07/2021 --> 397.08+ 19,765.98 = £20,163.06
iii) using annual t.u. NPV(i%) = 0 --> starting value i'= 11% pa
--> NPV(11%)= 112.6585 and NPV(12%)=-187.1173
therefore i≈ 11.3758≈ 11.4% pa
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:
(i)
(ii)
Month/Year
2019
2020
2021
January
155.2
170.9
182.6
July
163.4
175.2
187.5
Explain briefly why it is necessary in practice to index payments under an index-linked
bond using a time lag.
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.
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