Question 5 (12| What is the value today of the Treasury Bond? T-Bond Face Value Coupon Rate Semiannual Pmt Remaining Term (years) Current YTM PV Question 6 (12 Initial Investment - Treasury Bond PV Annual investment in stock fund Number of years Jenna saves money (years) Number of years of withdrawal (years) Return on stock fund (r, 2) Step 1: FV of saving from age 22-62 Step 2: Annual withdrawal amount beginning age 63 Hint: Step 1: Find how much money will Jenna save by the time she retires. Step 2: Once you know how much Jenna saves by retirement, this will become Jenna's PV at that age. Find payment (withdrawal) Jenna gets each year in Question 7 (12 Step 1: Find Cash flow for Jenna from now until retirement Time Period Cash Flow 0 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 231 24 25 26 2 Return on stook fundo, ) Inflation rate (g) Step 2: Find FV at Retirement Step 3: Jenna's first retirement withdrawal Step 4 Value of first retirment withdrawal in today's $ Should Jenna sell her Treasury bond and invest the proceeds in the stock tund? Question 8 [4 p Give at least one reason for and against this plan? Question 9 (12 Coca-Cola stock Current Price Annual Dividend Dividend Growth Expected Dividend in one year Adam's fellow graduate, Jenna, has been trying to decide how much of her new salary she could save for retirement. Jenna is considering putting $3,600 of her annual savings in a stock fund. She just turned 22 and has a long way to go until retirement at age 62, and she considers this risk level reasonable. The fund she is looking at has earned an average of 7.00% over the past 15 years and could be expected to continue earning this amount, on average. While she has no current retirement savings, four years ago Jennas grandparents gave her a new 30-year U.S. Treasury bond with a $13,500 face value with 4.00% 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 $3,600 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 93. 5. Suppose Jenna's Treasury bond has a coupon interest rate of 4.00%, paid semiannually, while current Treasury bonds with the same maturity date have a yield to maturity of 1.25% (expressed as an APR with semiannual compounding). If she has just received the bond's 8th 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 7.00% 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 2.00% a year is reasonable. She plans to save $3,600 the first year, and then increase the amount she saves by the amount of her annual salary increase. Unfortunately, prices will also grow due to inflation. Suppose Jenna assumes there will be 1.25% 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 today's 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 $49.01 per share instead. The stock just paid an annual dividend of $1.64 and she expects the dividend to grow at 2.50% annually. If the next dividend is due in one year, what expected return is Coca-Cola stock offering
