Suppose You Buy an Inflation-Indexed Bond That Will Adjust with Inflation

question 28

Essay

Suppose you buy an inflation-indexed bond that will adjust with inflation and thus pay you $2,500 in real (inflation- adjusted) terms each year for the next five years, plus your real principal of $100,000 at the end of the fifth year.The nominal interest rate is 4 percent and the expected inflation rate is 1 percent.What is the present value of the bond? Show your work.

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Definitions:

Exclusively Marine

Referring to organisms or features that are found only in the oceanic environment, not in fresh water or on land.

Chilopods

A class of arthropods known as centipedes, characterized by elongated bodies with a pair of legs per segmented body part.

Arachnids

A class of joint-legged invertebrate animals in the subphylum Chelicerata, including spiders, scorpions, ticks, and mites.

Phylogeny

The evolutionary history and relationship among species or groups of organisms, often illustrated as a tree-like diagram showing divergent lines of descent.