Background information:

Lynda is Dr. Ks sister and we are assuming she has hired you as a financial planner with a fiduciary relationship. As a fiduciary, you must make recommendations that are in Lyndas best interest not in your best interest, not in her childrens best interest, and not in her brothers best interest. Lynda asks you to evaluate five retirement distribution models. Lynda would like you to determine her annual retirement income and the year one annual withdrawal rate for each model. Assume Lynda is 65 years old, has $500,000 in a money market mutual fund, and expects to live 20 years in retirement. Lyndas goal is simple in that she wants to maximize her annual retirement income so she can travel the world, drive nice cars, eat at fancy restaurants, and so forth.

The annual withdrawal rate is the quantity of money, expressed as a percentage of the initial investment, which will be withdrawn during the year. For some reason, Lynda has specifically requested the annual withdrawal rate be reported to two decimal places. At a rate of $150 per hour, you are happy to oblige.

Annual withdrawal rate = annual income initial investment x 100.00%

Example: 10.00% = $50,000 $500,000 x 100.00%

A. Treasury model - Lynda, (as an investor, not a dealer) uses her $500,000 to buy Treasury bonds. Lynda can buy one of the following three Treasury bonds which have 20 years to maturity remaining:

Bond 1 has 3.50% coupon rate, 114.66 bid price, 115.66 asked price, and 2.50% YTM.

Bond 2 has 1.50% coupon rate, 83.34 bid price, 84.34 asked price, and 2.50% YTM.

Bond 3 has 2.50% coupon rate, 99.00 bid price, 100.00 asked price, and 2.50% YTM.

1. Which bond would you recommend for Lynda to buy? Explain your answer.

2. What would be Lyndas annual coupon interest? Explain your answer