Judy Johnson is choosing between investing in two Treasury securities that both mature in five years and

Question:

Judy Johnson is choosing between investing in two Treasury securities that both 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 which 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? 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 deciding which bond to purchase?

Coupon
A coupon or coupon payment is the annual interest rate paid on a bond, expressed as a percentage of the face value and paid from issue date until maturity. Coupons are usually referred to in terms of the coupon rate (the sum of coupons paid in a... Par Value
Par value is the face value of a bond. Par value is important for a bond or fixed-income instrument because it determines its maturity value as well as the dollar value of coupon payments. The market price of a bond may be above or below par,...