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 $850 each year. You use an expected investment return of 11% per year compounded semiannually.

What will be the equivalent future worth of the total money received with dividend reinvestment included?

Can you solve it without excel?

Answer #1

Long-term (nominal) U.S. Treasury Bonds ------------ in the
short-to-medium term.
Short-term (nominal) U.S. T-Bills ---------- in the
short-to-medium term.
U.S. stocks ---------- in the short-to-medium
term.
Options for blanks:
Provide no/zero protection against inflation
Provide good protection against inflation
Are exported to inflation
Suppose that your investment strategy is to buy a 15-year
Treasury Inflation Protected Security (TIPS), hold it for 1 year,
then sell it and buy another 15-year TIPS. You plan to repeat this
process until you retire (in 45...

You just buy a TIPS (Treasury Inflation-Protected Securities)
which is inflation-indexed, has a face value of $1,000, 4% coupon
rate, and a maturity of 3 years. Suppose for the following three
years the inflation rate is 3%, 4%, and 5%, respectively. 1) What
is your real cash flow in your holding period. 2) What is your
nominal cash flow in your holding period. 3) What is the real
return of the such investment in TIPS, suppose the selling price is...

1a. Treasury Inflation-Protected Securities (TIPS)
pay a fixed interest rate for life.
pay a variable interest rate that is indexed to inflation but
maintain a constant principal.
provide a constant stream of income in real (inflation-adjusted)
dollars.
have their principal adjusted in proportion to the Consumer
Price Index.
provide a constant stream of income in real (inflation-adjusted)
dollars and have their principal adjusted in proportion to the
Consumer Price Index.
1b.
Which one of the following is not a money...

The following questions are about Treasury Inflation Protected
Securities (TIPS).
(a) What is meant by the “real rate”?
(b) What is meant by the “inflation-adjusted principal”?
(c) Suppose that the coupon rate for a TIPS is 3%. Suppose
further that an investor purchases $10,000 of par value (initial
principal) of this issue today and that the annual inflation rate
is 2%.
Answer the below questions.
(1) What is the inflation-adjusted principal at the end of six
months?
(2) What is...

1. A increase in the tax rate causes ______ in the interest rate
on tax exempt bonds, such as municipal bonds.
A. increase
B. Decrease
C. No change
2.Suppose your marginal income tax rate is 20%.If a corporate
bond pays
15%,then the interest rate that an otherwise identical
municipal bond have to pay in order for you to be indifferent
between holding the corporate bond and the municipal bond is
_____ %.
(Round your response to the nearest whole number)....

At the beginning of his current tax year, David invests $11,590
in original issue U.S. Treasury bonds with a $10,000 face value
that mature in exactly 10 years. David receives $740 in interest
($370 every six months) from the Treasury bonds during the current
year, and the yield to maturity on the bonds is 5.4 percent.
(Round your intermediate calculations to the nearest whole
dollar amount.)
a. How much interest income will he report this
year if he elects to...

On 15 August 1996, the U.S. Treasury issued a bond maturing on
15 February 2026. The bond has a coupon rate of 6%, payable
semiannually on 15 February and 15 August. If a $100 face value
bond is selling for $117.25 on 15 February 2020, compute the bond’s
yield to maturity.
Compute the above bond’s duration on 15 February
2020.

A)On 15 August 1996, the U.S. Treasury issued a bond maturing on
15 February 2026. The bond has a coupon rate of 6%, payable
semiannually on 15 February and 15 August. If a $100 face value
bond is selling for $117.25 on 15 February 2020, compute the bond’s
yield to maturity.
B)Compute the above bond’s duration on 15 February 2020.

A $1,000 Treasury inflation-protected security is currently
selling for $973 and carries a coupon interest rate of 4.09
percent
a. If you buy this bond, how much will you receive for your
first interest payment, assuming no interest adjustment to
principal during this time period?
b. If there's a 0.83 percent increase in inflation, what will
be the new par value of the bond?
c. What is your new semiannual interest payment?
d. What would the par value be at...

U.S. Treasury issues three types of Treasury
securities: Treasury bills (T-bills), Treasury notes (T-notes), and
Treasury bonds (T-bonds). The time to maturity (TTM) of
T-bills is 12-month or less than 12-month. The TTM of T-notes
is between 1 year and 10 years. The TTM of T-bonds is longer
than 10 years. Which one(s) (T-bills, T-notes, or T-bonds)
belong to the money market instrument(s)? Which one(s) belong
to the capital market instrument(s)? If you would like to buy
Treasury securities, which...

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