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2. A Treasury inflation protection security (TIPS) has an original principal of \$50,000. Today’s semiannual nominal interest rate and semiannual real interest rate are 4% and 2%, respectively. We expect the semiannual nominal rate and semiannual real rate to rise to 5% and 2.5% in six months from now, respectively. What will be the principal of this TIPS at the end of one year from today? A) \$50,000 B) \$52,224 C) \$52,275 D) \$54,600 E) \$55,020 3. A firm has two \$1,000 par value bonds both selling for \$701.22. The first bond has a coupon rate of 8% and 20 years of maturity. The second bond has the same yield as the first bond but only 5 years of maturity. Both bonds pay coupons annually. What is the annual coupon payment on the second bond? A) \$18.56 B) \$28.65 C) \$35.18 D) \$37.12 E) \$38.24 4. Compute the price of the following Treasury bond: \$600 par, 5% coupon payable semiannually, and a maturity of 3.5 years. The T-bill rates at 6 months and 1 year are 3.2% and 3.6%, respectively. The Treasury spot rates at 1.5 years, 2 years, 2.5 years, 3 years, and 3.5 years are 3.7%, 4%, 3.8%, 4.2%, and 4.5%, respectively. All the interest rates are reported on a bond-equivalent basis. A) \$585.87
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