You observe the following Index Linked Gilt trading in the UK Govt Bond market (it is default free) and the evolution of

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You Observe The Following Index Linked Gilt Trading In The Uk Govt Bond Market It Is Default Free And The Evolution Of 1 (175.45 KiB) Viewed 55 times

You observe the following Index Linked Gilt trading in the UK Govt Bond market (it is default free) and the evolution of its par value, its issue price. It has an annual coupon paid at the end of the year on the prior year's par value (NB this is incremented by inflation each year). You may assume that its par value increases immediately at the year end by the rate of inflation without delay, also that coupons are paid in arrears on the day indicated. Date par value coupons received 01/01/2016 £234.000 -£234.000 01/01/2017 £241.020 £1.170 £1.170 01/01/2018 £245.840 £1.205 £1.205 01/01/2019 £248.299 £1.229 £1.229 01/01/2020 £255.748 £1.241 £1.241 01/01/2021 £265.978 £1.279 £267.256 01/01/2022 £1.330 a) Calculate the rates of annual inflation experienced in each of the five years of observation (don't enter % sign or numbers as decimals) i) 2016-2017 ii) 2017-2018 iii) 2018-2019 iv) 2019-2020 v) 2020-2021 b) What is the arithmetic mean of the annual inflation rates? c) What is the geometric mean of the annual inflation growth factors? d) What is the coupon rate on this inflation linked bond? e) Given your coupon rate, what interest will accrue over exactly half a year from 01/01/21? f) Using either average annual growth rate of inflation from b) or the geometric mean of growth factors less one, estimate the IRR or realised yield to maturity on this ILG. g) In five lines of text, say in your own words how ILGs and TIPs help the UK and US Govts in their debt raising and economy managing roles.