[Solution]Treasury index-linked stock

Question 1: What price would you have to pay to secure a yield to maturity, or redemption yield, equivalent to 3% per annum on a…

Question 1:

What price would you
have to pay to secure a yield to maturity, or redemption yield, equivalent to
3% per annum on a purchase of UK Treasury 2% Stock maturing in five years time?
Assume that the bond matures in exactly 5 years time, and that the next
interest payment will occur in exactly 1 year’s time. (20 Marks)

Question 2:

You find that Treasury
index-linked stock maturing in 2027 offers a redemption yield, adjustable for
inflation, of 0.25%. Treasury 1.75% stock, which also matures in 2027 but with
cash flows NOT adjustable for inflation, offers a redemption yield of 3.25%.
What is the inflation rate expected, by investors, to prevail between now and
2030? (20 Marks)

Question 3:

You believe that an
annual income of £25,000 (or its equivalent after inflation) will be sufficient
for you when you retire in 30 years’ time. You find that an inflation-linked
annuity providing such an annual income can currently be purchased for
£720,000. How much should you save each year (adjustable for inflation) in
order to be able to purchase such an annuity in 30 years’ time, assuming that
you invest all your savings in Treasury Index-Linked stock, with a yield of
0.25% as above? (20 Marks)

Question 4:

You see that an
investment in a portfolio of FTSE-100 shares yields an annual dividend of 3.2%.
How much should you save each year (adjustable for inflation) in order to be
able to purchase the annuity above, assuming that you invest all your savings
in FTSE-100 shares? (20 Marks)

Question 5:

Apart from the comparative
annual amounts saved, what other factors would influence your choice of
investment type, if you were limited to a choice between the Treasury
index-linked stock, as in Part 3, and the portfolio of FTSE-100 shares, as in
Part 4? (300 words)/ 7 references

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