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 $1200 each year. You use an expected investment return of 14.5% per year compounded semiannually.

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

No 0 1 2 3 4 5 6 7 8 9 10 11 12 13 Increment In Opening FV factor Future Interest bond Value Balance @ 7.25% Value A B D (A+B+C)xD 10000 4.0546 40,545.81 200 3.7805 756.10 200 3.5249 704.99 200 3.2867 657.33 200 3.0645 612.90 200 2.8573 571.46 200 2.6642 532.83 200 2.4841 496.82 200 2.3162 463.23 200 2.1596 431.92 200 2.0136 402.72 200 1200 1.8775 2,628.47 200 1200 1.7506 2,450.79 200 1200 1.6322 2,285.12 200 1200 1.5219 2,130.65 200 1200 1.4190 1,986.62 200 1200 1.3231 1,852.33 200 1200 1.2336 1,727.11 200 1200 1.1503 1,610.36 200 1200 1.0725 1,501.50 200 1200 1.0000 1,400.00 65,749.06 14 15 16 17 18 19 20 The Future Worth = $ 65,749.06

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