Suppose the workers at Gideon Industries negotiated a contract that paid out $10,000,000 per year for the next five years.

a. If the current risk-free rate is 5%, what would be the present value of a COLA (cost of living adjustment) clause in their contract for the five-year period? Use the TIPS data provided in the chapter.

b. What is the fixed-wage increase that would make the union indifferent between the COLA and a fixed wage structure?

Treasury Inflation Protected Securities (TIPS) NAME COUPON PRICE YIELD 1 MONTH 1 YEAR TIME (EDT) 0.13 GT115:GOV 5 Year 100.43 0.04% +5 5/26/2017 0.38 99.57 0.42% +6 +18 5/26/2017 GTI 10:GOV 10 Year 3.38 140.37 0.55% +5 +3 GT1120:GOV 20 Year 5/26/2017 0.88 98.05 0.95% GT1130.GOV 30 Year +5 +8 5/26/2017 Treasury Inflation Protected Securities (TIPS) NAME COUPON PRICE YIELD 1 MONTH 1 YEAR TIME (EDT) 0.13 GT115:GOV 5 Year 100.43 0.04% +5 5/26/2017 0.38 99.57 0.42% +6 +18 5/26/2017 GTI 10:GOV 10 Year 3.38 140.37 0.55% +5 +3 GT1120:GOV 20 Year 5/26/2017 0.88 98.05 0.95% GT1130.GOV 30 Year +5 +8 5/26/2017