2- what is the governing equation for this situation and what is the inflation r

Question

2- what is the governing equation for this situation and what is the inflation rate?
3. ( a) You wish to obtain an annual rate of return of 12% from a bond investment. You will buy a bond with PAR value 10,00°and bond rate of return of 6% compounded semiannually. You hold it for three years exactly and then sell it for 10,500. What is the maximum purchase price you can afford to reach your rate of return goal? (b) Independent ofpart (a). You have an investment that returns 12% per year. After careful study you notice that your purchasing power has only increased 8% per year. This you attribute to inflation. What is the governing equation for this situation and what is the inflation rate?

Explanation / Answer

3. the maximum purchase price will be= par value of the bond is 10,000, interest rate 6% semi annually, then the purchasing price will be= 10000*(1+0.06/2)6= 11940

he can buy the bond with less than 11940

b. in this case the inflation rate is 4%. because your returns are 12% but the purchasing power only increases to 8%. the gap is because of inflation only.

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