1. You just deposited $4,000 in a savings account paying 12% for one year. Suppose that the price level is expected to grow at a rate of 3% over the course of that year. a. Find the expected growth rate of the purchasing power of your money. Make sure to show your work. b. If the inflation rate turns out to be 3.75%, are you better off or worse off? Explain your answers.
2. Consider a 5-year bond paying 8 percent coupon. The bond is currently priced at $975. a. Find the yield to maturity. Make sure to show your work. b. Find the realized yield if cash flows are reinvested at the yield to maturity. Explain your answers. Make sure to show your work. c. Find the realized yield if reinvestment rates are: 9 percent today, 10 percent in one year, 11 percent in two years, 12 percent in three years, 11 percent in four years, 10 percent in five years. Explain your answers. Make sure to show your work.