Lynda is Dr. K's 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 Lynda's best interest ... not in your best interest, not in her children's best interest, and not in her brother's best interest. Lynda asks you to evaluate five retirement distribution models. Lynda would like you to determine her annual retirement income and the year oneannual withdrawal ratefor each model. Assume Lyndais 65 years old, has $500,000 in a money market mutual fund, and expects to live 20 years in retirement. Lynda's 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.

Theannual withdrawal rateis the quantity of money, expressed as a percentage of the initial investment, which will be withdrawn during the year.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 theannual withdrawal ratebe 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%

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.

 

Required Questions : 

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

2.What would be Lynda's annual coupon interest? Explain your answer

3.What would be the year oneannual withdrawal rate? Explain your answer.

4.In this question, you can pretend you are one of Lynda's children and there is no fiduciary relationship. Let us assume Lynda will buy one of the three Treasury bonds and then bequeath in her will the Treasury bond to her children ... the childrenwill inherit the Treasury bond when Lynda passes away. Lynda asks the children to select the Treasury bond that will maximize the children's wealth (not Lynda's wealth). There is a catch where if the children select the wrong Treasury bond, Lynda will bequeath the Treasury bond to their Uncle Bob. Which Treasury bond will maximize the children's wealth? Explain your answer.