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Unformatted text preview: Thus, Nom rate of return = (End PriceBeg Price + Coupon)/Beg Price Now, note that because this thing is selling at par, End price = Ending par value and Beg Price = Beg Par Value (because both the coupon and the nominal yield are growing at the inflation rate) Thus, Nom rate of return (Year 1) = (10201000+40.80)/1000 = 6.08% In years 2 and 3, the par value and (thus the coupon) will increase by the inflation rates for that period, 3% and 1%. Remember that the beg price for year 2 will be 1020, not 1000. Nom rate of return (year 2) = (1050.6  1020+40.80*1.03)/1020 = 7.12% Nom rate of return (3) = (1061.11  1050.6+42.02*1.01)/1050.6 = 5.04% Now, use the inflation formula to get the real rate of return: Year 1: (1+0.0608)/(1+0.02) = 1.04 Year 2: (1+0.0712)/(1+0.03) = 1.04 Year 3: (1+0.0504)/(1+0.01) = 1.04 The real rate of return is 4% each year. Not a coincidence!...
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This note was uploaded on 12/05/2011 for the course ECON 134b taught by Professor Johnhartman during the Fall '11 term at UCSB.
 Fall '11
 JohnHartman
 Inflation

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