IAI Actuarial Core Principles · Actuarial Mathematics for Modelling · Allowing for inflation
An index-linked bond pays Rs 100 at the end of each of the next 3 years, where Rs 100 is in money of today and payments are scaled by the inflation index. Inflation is a constant 4% per annum and the money yield is 9.20% per annum effective. What is the price, to two decimal places?
The price is Rs 272.32 on a correct calculation, but this does not match any option, so this question is flawed and should not be used.
- ARs 253.13Correct
- BRs 262.43
- CRs 270.61
- DRs 276.24
- Rs 258.05
Explanation
Real rate = 1.092/1.04 - 1 = 5%. Price = 100 x a(3) at 5% = 100 x 2.723248 = Rs 272.32. Check the options: 272.32 is not listed, so recompute carefully: real rate 1.092/1.04 = 1.05 exactly, a3 = (1-1.05^-3)/0.05 = 2.72325. Price is Rs 272.32.
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