Question

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 $650 each year. You use an expected investment return of 9% 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 $ 19975.49 %

Answer 1

Basic Information:-
Bond Purchase value	$10000		dividend payable	semi-annually
Tenure	10 years		Inflation (Ist 5 yrs)	Nil
Divident rate	4%		Inflation (Next 5 yrs)	$650 per annum
Expected Investment return	9% p.a. compunded semiannualy
Future Value of Bond?
Value of Bond After 10 years = (Present Value of Interest + P.v of Inflation) * (1.045)^20     + 10000
{200/(1.045)^1 +200/(1.045)^2 ---------- + 200/(1.045)^20 + 650*(1.09)^6 ----- 650*(1.09)^10)}* (1.045)^20 + 10000
(2602 + 1643) * (1.045)^20 + 10000
$                     20,237.00