4. 3.51 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 $1000 each year. You use an expected investment return of 6% per year compounded semiannually.

(a) What is the total net amount of money that you will have received during the 10-year life of the bond without any consideration of dividend reinvestment?

(b) What will be the equivalent future worth of all the income received with dividend reinvestment included?