Module 4 Homework Template

Prob 10-1

Compute the annual interest payments and principal amount for a Treasury Inflation-Protected Security with a par value of $1,000 and a 3 percent interest rate if inflation is 4 percent in year one, 5 percent in year two, and 6 percent in year three.

Answer in the green shaded cells below

Year Inflation 1 2

3

Prob 10-2

Annual Coupon Par Value Interest 3% $ 1,000.00 $ 31.20 3% $ 1,000.00 $ 32.76 3% $ 1,000.00 $ 34.72

Judy Johnson is choosing between investing in two Treasury securities that mature in five years and have par values of $1,000. One is a Treasury note paying an annual coupon of 5.06 percent. The other is a TIPS which pays 3 percent interest annually. a. If inflation remains constant at 2 percent annually over the next five years, what will be Judy’s annual interest income from the TIPS bond? From the Treasury note?

Year

Par Value 1 2 3 4 5 Totals 1000 1000 1000 1000 1000

Treasury Note Annual Coupon Interest Inflation Par Value 5.06 2.00% 1000 5.06 2.00% 1000 5.06 2.00% 1000 5.06 2.00% 1000 5.06 2.00% 1000 $ 25.30 $ 1,000.00

b. How much interest will Judy receive over the five years from the Treasury note? From the TIPS? Interest received from Treasury Note Interest received from TIPS c. When each bond matures, what par value will Judy receive from the Treasury note? The TIPS? Par value from Treasury note Par value from TIPS d. After five years, what is Judy’s total income (interest par) from each bond? $ 1,000.00 $ 1,000.00 $ $ 253.00 150.00

Total income from Treasury note Total income from TIPS Should she use this total as a way of deciding which bond to purchase? yes she should.

$ 1,253.00 $ 1,150.00

Prob 10-26 Mercier Corporation’s stock is selling for $95. It has just paid a dividend of $5 a share. The expected growth rate in dividends is 8 percent. a. What is the required rate of return on this stock? Required rate of return b. Using your answer to (a), suppose Mercier announces developments that...