Jenna has been trying to decide how much of her new salary she could save. Jenna believes she could easily set aside $3000 of her $45,000 salary. She is considering putting her savings in a stock fund. She just turned 22 and has a long way to go until retirement at age 65 and she considers this risk level reasonable. The fund she is looking at has earned an average of 9% over the past 15 years and could be expected to continue earning this amount on average. While she has no current retirement savings, five years ago Jennas grandparents gave her a new 30-year U.S. Treasury bond with a $10,000 face value.

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 $3000 at the end of each year in the stock fund from now until she turns 65. Once she retires, Jenna wants those savings to last for 25 years until she is 90. Jenna needs to determine her best options.

1. Suppose Jenna's Treasury bond has a coupon interest rate of 6.5%, paid semiannually, while current Treasury bonds with the same maturity date have a yield to maturity of 5.4435% (expressed as an APR with semiannual compounding). If she has just received the bond's 10th coupon, for how much can Jenna sell her treasury bond?

2. Suppose Jenna sells the bond, reinvests the proceeds, and then saves as she planned. If, indeed, Jenna earns a 9% 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.)

3. Jenna expects her salary to grow regularly. While there are no guarantees, she believes an increase of 4% a year is reasonable. She plans to save $3000 the first year, and then increase the amount she saves by 4% each year as her salary grows. Unfortunately, prices will also grow due to inflation. Suppose Jenna assumes there will be 3% inflation every year. In retirement, she will need to increase her withdrawals each year to keep up with inflation. In this case, how much can she withdraw at the end of the first year of her retirement? What amount does this correspond to in today's dollars? (Hint: Build a spreadsheet in which you track ~ the amount in her retirement account each year.)

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

5. At the last minute, Jenna considers investing in Coca-Cola stock at a price of $55.55 per share instead. The stock just paid an annual dividend of $1. 76 and she expects the dividend to grow at 4% annually. If the next dividend is due in one year, what expected return is Coca-Cola stock offering?