Question

Required information Treasury securities are issued and backed by the U.S. government and therefore, are considered to be the lowest-risk securities on the market. As an investor looking for protection against inflation, you are considering the purchase of inflation-adjusted bonds known as U.S. Treasury Inflation Protected Securities (TIPS). With these securities, the face value (which is paid at maturity) is regularly adjusted to account for inflation; however, the semiannual interest payment (called the bond dividend) remains the same. You purchased a 10-year $10,000 TIPS bond with dividend of 4% per year payable semiannually (i.e., $200 every 6 months). Assume there is no inflation adjustment for the first 5 years, but in years 6 through 10, the bond face value increases by $1450 each year. You use an expected investment return of 14% per year compounded semiannually. NOTE: This is a multi-part question. Once an answer is submitted, you will be unable to return to this part. What will be the equivalent future worth of the total money received with dividend reinvestment included? The future worth of all the income received would be $

Answer 1

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loond $ (paid six months Amount invested today, in bord (US TICS) at maturity) de 200 $ divideod payable every @ 4% pa payable Semi - annually Dividend amount reinvested @ 14% p.a. 5 for first 5 years dividend will be @ 22 paid li e. 200 $ for 6 months per years (10 installments) Later on face value for 6th year . become looo +1450 = 11450 $ then at 7th year it will be 11450+ 145o = 12900 $ & so 29 & for increase , of 1450 $ each year 6 months ieterest is paid entra (1450 x 27) : Dividend will be as follows s2 Year 6 G to 7 229+29 - 253 8 258 + 29 = 287 & 287 9 287+292_316 316 316 +292 345 345 lo Bond Value at year end 10 10000 + 1450 x 5 17250 $ Dividend is jovested @ 14%. Compounded semiannually; 2294(1.07) + 229 x (1.07) + 258°x (1:07)® + 258 x(1.077 ' (237x1600 287 x (1.07 316 x(1:07)!*41.07) 5x (1.078² + 345x6-07) mora + + + 345² 4126.48 .. Future Value including all investment 125 +426:48 21376.48 ORDS

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