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Return on tresury Bills, Bond Valuation

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

Question 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.)

Solution Summary

Answers questions on average return, standard deviation of return, average real return for treasury bills and valuation of bonds.

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