week 6 2. Judy Johnson is choosing between investing in two Treasury securities
ID: 2665897 • Letter: W
Question
week 62. Judy Johnson is choosing between investing in two Treasury
securities that mature in five years and have par values of $1,000.
One is a Treasury note paying an annual coupon of 5.06 percent.
The other is a TIPS that pays 3 percent interest annually.
a. If inflation remains constant at 2 percent annually over the
next five years, what will be Judy's annual interest income
from the TIPS bond? From the Treasury note?
b. How much interest will Judy receive over the five years from
the Treasury note? From the TIPS?
c. When each bond matures, what par value will Judy receive
from the Treasury note? From the TIPS?
d. After five years, what is Judy's total income (interest + par)
from each bond? Should she use this total as a way of decid¬
ing which bond to purchase?
Explanation / Answer
Long term funds are provided by ownership equity and long-term credit, often in the form of bonds. The balance between these elements forms the company's capital structure. Short-term funding or working capital is mostly provided by banks extending a line of credit. Another business decision concerning finance is investment, or fund management. An investment is an acquisition of an asset in the hope that it will maintain or increase its value. In investment management – in choosing a portfolio – one has to decide what, how much and when to invest. To do this, a company must:
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