12.18
An index-linked bond pays half-yearly coupons and is redeemable at par on
28 February 2024. The coupon paid on 28 February 2008 was £2.10. A non-taxpayer
buys £100 nominal of the bond on 29 February 2008. Assuming that future inflation is
5.25% pa, how much should this investor pay in order to obtain a money rate of return
of 10% pa?

12.17
An entrepreneur is considering a business project that will be financed by an
unrestricted loan (effectively an overdraft). The only outlay required is an initial cost of
£80,000. The income is received annually in arrears. At the end of the first year the
income is expected to be £8,800 and inflation is expected to increase this each year
thereafter by 10% pa compound. The entrepreneur may borrow and invest money at
12% pa interest.
If the project is expected to last for twelve years, calculate:
(i) the largest overdraft held during the term of the project, and
(ii) the net present value of the project at 12% pa effective.

12.16
Consider a property developer who buys a property at time 0 for £90,000. He also
spends £10,000 at time 0 to buy some materials he will use to develop the property.
Ignoring inflation, the investor thinks that the property will be worth £110,000 today if
some improvements to the property are made.
The developer expects to make the improvements over the next year and sell the
property at time 1. Inflation is 5% pa.