Genie Would Like to Receive an Exact Real Rate of Return

question 56

Essay

Genie would like to receive an exact real rate of return of 5% per year on a bond investment at a time when the expected rate of inflation is 4.5%.
a)What nominal rate of return would Genie expect to receive on a bond investment?
b)How much would Genie be willing to pay for a bond maturing in five years if it pays a semi-annual coupon of 8%?

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Definitions:

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