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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 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

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