- Question 2 22 Points Rubi Inc Is A Manufacturer Of High Quality Pillows Today The Company Issued A 5 Year Inflatio 1 (95.45 KiB) Viewed 10 times
- Question 2 22 Points Rubi Inc Is A Manufacturer Of High Quality Pillows Today The Company Issued A 5 Year Inflatio 2 (102.14 KiB) Viewed 10 times
Question 2 (22 points): Rubi Inc. is a manufacturer of high-quality pillows. Today, the company issued a 5-year inflation linked (real) bond with a face value of $1,000. The bond has an annual stated real interest rate of 6% and pays annual coupon payments. The face value of the bond is paid at maturity of the bond. Also today, Dan Ltd, a company which operates in the same industry and bears the same risks, issued a 5-year nominal bond for its face value, which reflects a YTM of 10% (This bond has the same level of risk and characteristics as Rubi's bond, except for the coupon rate and indexing mechanism). The annual expected inflation for the next 5 years is 2%. a. What was the price of Rubi's bond on its issuing date? Answer: The price of the bond is $
b. Assume that 2 years after the bonds were issued (and right after the coupon payments), you were informed that the actual annual inflation was 4%. Further, you were also told that given the higher-than-expected inflation, future expectations were revised and now reflect an annual expected inflation of 3% for the next 5 years. Currently, Dan's bond is still traded for its face value. What is Rubi's current bond price (right after the second coupon payment)? Answer: The price of the bond is $ c. Following item (b), 2 years after the bonds were issued, has the real interest rate increased/decreased/remained unchanged/cannot know, compared to the real interest rate at the bonds' issuance date? Please explain. Answer: The real interest rate has