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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...
Judy Johnson is choosing between investing in two Treasury securitiesthat mature in five years and have par values of $1,000. One isa Treasury note paying an annual coupon of 5.06 percent. The otheris a TIPS which pays 3 percent interest annually.a. If inflation remains constant at 2 percent annually over thenext five years, what will be Judy’s annual interest incomefrom the TIPS bond? From the Treasury note?b. How much interest will Judy receive over the five years fromthe Treasury note? From the TIPS?c. When each bond matures, what par value will Judy receivefrom the Treasury note? The TIPS?d. After five years, what is Judy’s total income (interest par)from each bond? Should she use this total as a way of decidingwhich bond to purchase?
