How does inflation impact returns

Assignment Help Financial Management
Reference no: EM131048162

How does inflation impact returns? In this example, you will see how the Fisher equation can be used to determine the best investment option. Suppose Jim has $2,000 to invest and he is not sure what will happen to inflation over the coming year, but the overall market expectation is for inflation to be around 3%. Jim is still uncertain, but he decides to hedge his bets and buy a $1,000 one-year bond paying a 4% annual coupon rate (Bond A). He puts the other $1,000 into a different one-year bond that is indexed to inflation that pays a 1% coupon rate plus an inflation premium that is linked to the consumer price index (Bond B).

At the end of the year, the CPI shows that inflation was actually 5% for the year.

1. Calculate the end of year value of Jim’s two distinct investments assuming both mature at year end.

Reference no: EM131048162

Questions Cloud

Assume that the yield to maturity remains constant : A bond has a $1,000 par value, 10 years to maturity, and a 8% annual coupon and sells for $980. What is its yield to maturity (YTM)? Potter Industries has a bond issue outstanding with an annual coupon of 6% and a 10-year maturity. The par value of t..
How do you want to define yourself in ten years : How do you want to define yourself in 10 years? Using a single sentence, what would you provide others as your vision statement?
About the sustainable growth rate : Last year Lakesha’s Lounge Furniture Corporation had an ROE of 18.2 percent and a dividend payout ratio of 24 percent. What is the sustainable growth rate?
Provide an analysis of the organisational value : ITECH 7401 Leadership for IT Project Management - details of critical assumptions and constraints and an analysis of options and recommendations
How does inflation impact returns : How does inflation impact returns? In this example, you will see how the Fisher equation can be used to determine the best investment option. Suppose Jim has $2,000 to invest and he is not sure what will happen to inflation over the coming year, but ..
Develop and prepare a formal bsc for the coca cola company : Develop and prepare a formal BSC for the COCA COLA company. For each of the 4 major areas there should be a minimum of 3 objectives with appropriate measures for each.
Expect based on your estimate of the dividend growth rate : In mid-2015, Coca-Cola Company (KO) had a share price of $39. Its dividend was $1.00 per year, and you expect Coca-Cola to raise this dividend by approximately 7% per year in perpetuity. If Coca-Cola’s equity cost of capital is 8%, what share price w..
Present gdp per capita in each country on one chart : Present GDP per capita in each country on one chart. Compare and comment on the differences between each country and over time. Discuss possible reasons for those differences
Graphing bond prices versus time to maturity : Bond X is a premium bond making annual payments. The bond has a coupon rate of 9%, a YTM of 7%, and has 13 years to maturity. Bond Y is a discount bond making annual payments. In 13 years? What’s going on here? Illustrate your answers by graphing bon..

Reviews

Write a Review

Financial Management Questions & Answers

  What is the internal rate of return of this project

A research division of a large consumer electronics company has developed a new type of mp3 player. The production costs in the current period will be $1,399,100. The new product will produce a cash flow of $500,000 a year for 4 consecutive years beg..

  What is the required return for a stock

What is the required return for a stock that has a 5.7% constant-growth rate, a price of $21.25, an expected dividend of $1.70, and a P/E ratio of 10?

  What is the equivalent uniform annual worth

Trixie is buying a new car at a cost of $22099. She estimates the car will sell for $3118 at the end of year 6. Insurance, fees, maintenance, and gas will be $1108 in year 1 and will increase every year by 9%. If she keeps the car for 6 years, what i..

  Cash flow reporting methods

Of the 4 cash flow reporting methods provided, which method is used in the following scenario? Scenario: Assumptions • Item: The proposal is for the purchase of a new MRI machine • Cost: The machine costs $1,500,000.

  Assessing the financial health of the business

Which of the three key figures on the Cash Flow Statement is the most important for assessing the financial health of the business?

  Would a stock split or a stock dividend suffice

Assume your firm has never distributed cash to its shareholders. However, now you are trying to determine the appropriate way to distribute some cash that is consistent with maximizing shareholder wealth. Why would a dividend distribution be importan..

  Create a tracking portfolio for the convertible bond

A default free convertible bond can be converted to 1.4 shares of stock at the option of the bondholder. Each convertible bond carries a face value of 100 and an annual coupon rate 6%. The conversion to stock may take place today or at the end of yea..

  What price change would lead to a margin call

A company enters into a futures contract to sell 5,000 bushels of wheat for 750 cents per bushel. The initial margin is $3,000 and the maintenance margin is $2,000. What price change would lead to a margin call? Under what circumstances could $1,500 ..

  Semi annual bonds-what is the bonds price

Haswell Enterprises' semi annual bonds have a 10-year maturity, a 6.25% semi annual coupon, and a par value of $1,000. The going rate of interest is 4.75%. What is the bond's price?

  Uses the proceeds to repurchase shares

Dupuis can borrow at 12.00 percent. Dupuis currently has no debt, and the cost of equity is 15 percent. The current value of the firm is $676,000. The corporate tax rate is 38 percent. What will the value be if Dupuis borrows $227,000 and uses the pr..

  What is the cost of external equity

Messman Manufacturing will issue common stock to the public for $42.50. The expected dividend and growth in dividends are $2.12 per share and 5.80%, respectively. If the flotation cost is 8.95% of the issue's gross proceeds, what is the cost of exter..

  Assume that the risk-free rate of interest

Harrison Corporation is interested in acquiring Van Buren Corporation. Assume that the risk-free rate of interest is 3% and the market risk premium is 7%.

Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd