Henna, was lucky. Her parents gave her a car for graduation.Okay, it was a little Hyundai, and definitely not her dream car,but it was serviceable, and Henna didn’t have to worry about buyinga new car. In fact, she has been trying to decide how much of hernew salary she could save. Neile knows that with a hefty carpayment, saving for retirement would be very low on his prioritylist. Henna believes she could easily set aside $3000 of her$45,000 salary. She is considering putting her savings in a stockfund. She just turned 22 and has a long way to go until retirementat age 65, and she considers this risk level reasonable. The fundshe is looking at has earned an average of 9% over the past 15years and could be expected to continue earning this amount, onaverage. While she has no current retirement savings, five yearsago Henna’s grandparents gave her a new 30-year U.S. Treasury bondwith a $10,000 face value.
Henna wants to know her retirement income if she both (1)sells her Treasury bond at its current market value and invests theproceeds in the stock fund and (2) saves an additional $3000 at theend of each year in the stock fund from now until she turns 65.Once she retires, Henna wants those savings to last for 25 yearsuntil she is 90.
Queation: Suppose Henna’s Treasury bond has a coupon interestrate of 6.5%, paid semiannually, while current Treasury bonds withthe same maturity date have a yield to maturity of 5.4435%(expressed as an APR with semiannual compounding). If she has justreceived the bond’s 10th coupon, for how much can Henna sell hertreasury bond?
