Problem 1:
Calculating Returns Refer to the following table:
Year T-bills Inflation
1973 0.0729 0.0871
1974 0.0799 0.1234
1975 0.0587 0.0694
1976 0.0507 0.0486
1977 0.0545 0.0670
1978 0.0764 0.0902
1979 0.1056 0.1329
1980 0.1210 0.1252
Requirement 1:
Calculate the average return for Treasury bills and the average annual inflation rate (consumer price index) for this period. (Do not include the percent sign (%). Round your answers to 2 decimal places, e.g. 32.16.)
Average Treasury bill return_______ percent
Average inflation_______percent
Requirement 2:
Calculate the standard deviation of Treasury bill returns and inflation over this period. (Do not include the percent sign (%). Round your answers to 2 decimal places, e.g. 32.16.)
Standard deviation T-bills_______ percent
Inflation_______ percent
Requirement 3:
Calculate the average real return for Treasury bills over this period. (Negative amount should be indicated by a minus sign. Do not include the percent sign (%). Round your answers to 2 decimal places, e.g. 32.16.)
Average real return _____ percent
Problem 2: Valuing Bonds
The Mangold Corporation has two different bonds currently outstanding:
Bond M has a face value of $14,000 and matures in 21 years. The bond makes no payments for the first 8 years, then pays $700 every six months over the subsequent 5 years, and finally pays $800 every six months over the last 8 years.
Bond N also has a face value of $14,000 and a maturity of 21 years; it makes no coupon payments over the life of the bond. If the required return on these bonds is 11 percent compounded semiannually, the current price of Bonds M and N is $ and $ , respectively. (Round your answers to 2 decimal places, e.g. 32.16.)