Use information in the table below to answer the following questions.
Average CPI inflation rate 2005 - 2015 2.3%
Yield on a 10-year conventional Treasury Security January 2005 4.22%
Yield on a 10-year Treasury Inflation Protected Security (TIPS) January 2005 1.72%
Yield on a 5-year conventional Treasury Security in January 2005 3.71%
Income tax rate for an individual earning $100,000 per year in taxable income in 2015 28%
1. Suppose an investor purchases $100 of face value of a conventional 10-year Treasury security in 2005. Assume the bond is a discount bond and there are no coupon payments. What price does the investor pay in 2005?
2. Suppose an investor purchases $100 of face value of an inflation protected Treasury security in 2005. Assume the bond is a discount bond and there are no coupon payments. What price does the investor pay in 2005?
3. Suppose an investor purchases a 10-year inflation protected Treasury security in 2005 for $10,000. How much will the investor collect in 2015 when the bond matures?
4. Refer to the yield on the TIPS and the conventional Treasury security in 2005. What is the expected inflation rate in 2005?
Hint: You can find the expected inflation rate as inflation rate that equates the real interest rate on the conventional and TIPS securities.
5. Refer to the figure above. Suppose an investor who earns $100,000 per year purchases a conventional 10-year Treasury security for $10,000. Assume the bond is a discount bond and there are no coupon payments. How much would the investor be required to pay in taxes on interest income?