Adams fellow graduate, Jenna, has been trying to decide how much of her new salary she could save for retirement. Jenna is considering putting $2,750 of her monthly savings in a stock fund. She just turned 22 and has a long way to go until retirement at age 63, and she considers this risk level reasonable. The fund she is looking at has earned an average of 6.25% over the past 15 years and could be expected to continue earning this amount, on average. While she has no current retirement savings, eight years ago Jennas grandparents gave her a new 30-year U.S. Treasury bond with a $20,000 face value with 4.5% semiannual coupons. Jenna wants to know her retirement income if she both (1) sells her Treasury bond at its current market value and invests the proceeds in the stock fund and (2) saves an additional $2,750 at the end of each year in the stock fund from now until she retires. Once she retires, Jenna wants those savings to last until she is 96.

5. Suppose Jennas Treasury bond has a coupon interest rate of 4.5%, paid semiannually, while current Treasury bonds with the same maturity date have a yield to maturity of 3.00 % (expressed as an APR with semiannual compounding). If she has just received the bonds 16th coupon, what is the value of Jennas Treasury Bond today?

6. Suppose Jenna sells the bond, reinvests the proceeds, and then saves as she planned. If, indeed, Jenna earns a 6.25% annual return on her savings, how much could she withdraw each year in retirement? (Assume she begins withdrawing the money from the account in equal amounts at the end of each year once her retirement begins.)

7. Jenna expects her salary to grow regularly. While there are no guarantees, she believes an increase of 3.25% a year is reasonable. She plans to save $2,750 the first year, and then increase the amount she saves by 3.25% each year as her salary grows. Unfortunately, prices will also grow due to inflation. Suppose Jenna assumes there will be 2.75% inflation every year. In retirement, she will need to increase her withdrawals each year to keep up with inflation.

a. How much money will Jenna have at her retirement?

b. How much can she withdraw at the end of the first year of her retirement in todays dollars?

Hint: Value Jennas Retirement Fund at Retirement Age = FV of Treasury Bond + FV of Jennas Savings

8. Should Jenna sell her Treasury bond and invest the proceeds in the stock fund? Give at least one reason for and against this plan.

9. At the last minute, Jenna considers investing in Coca-Cola stock at a price of $53.48 per share instead. The stock just paid an annual dividend of $1.60 and she expects the dividend to grow at 4.00% annually. If the next dividend is due in one year, what expected return is Coca-Cola stock offering?