Back in 2010, Mary Goldberg, a 34-year-old widow, got a telephone call from a Wall Street account executive who said that one of his other clients had given him her name. Then he told her his brokerage finn was selling a new corporate bond issue in New World Explorations, a company heavily engaged in oil exploration in the western United States. The bonds in this issue paid investors 8.9 percent a year. He then said that the minimum investment was $10,000 and that if she wanted to take advantage of this “once in a lifetime” opportunity, she had to move fast. To Mary, it was an opportunity that was too good to pass up. and she bit hook, line, and sinker. She sent the account executive a check−and never heard from him again. When she went to the library to research her bond investment, she found there was no such company as New World Explorations. She lost her $10,000 and quickly vowed she would never invest in bonds again. From now on, she would put her money in the bank, where it was guaranteed.
Over the years, she continued to deposit money in the bank and accumulated more than $62,000. Things seemed to be pretty much on track until her certificate of deposit (CD) matured. When she went to renew the CD, the bank officer told her interest rates had fallen and current CD interest rates ranged between 1 and 2 percent. To make matters worse, the banker told Mary that only the bank’s 60-month CD offered the 2 percent interest rate. CDs with shorter maturities paid lower interest rates.
Faced with the prospects of lower interest rates. Mary decided to shop around for higher rates. She called several local banks and got pretty miith the same answer. Then a friend suggested that she talk to Peter Manning an account executive for Fidelity Investments. Manning told her there were conservative corporate bonds and quality stock issues that offered higher returns. But, be warned her, these investments were nor guaranteed. If she wanted higher returns, she would bave to take some risks.
While Mary wanted higher returns, she also remembered how she bad lost $10,000 investing in corporate bonds. When she told Peter Manning about her bond investment in the fictitious New World Explorations, he pointed out that she made some pretty serious mistakes. For starters, she bought the bonds over the phone from someone she didn’t know and she bought them without doing any research. He assured her that the bonds and stocks he would recommend would be issued by real companies, and she would be able to find a lot of information on each of his reconmendations at the library or on the Internet. For starters, he suggested the following three investments:
1. A DuPont corporate bond that pays 4.250 percent annual interest and matures on April 1, 2021. This bond has a current market value of $l,120 and is rated A.
2. An Alcoa corporate note that pays 5.40 percent annual interest and matures on April 15, 2021. This bond bas a current market value of $l,090 and is rated BBB.
3. Procter & Gamble common stock (listed on the New York Stock Exchange and selling for $82 a share with annual dividends of $2.68 per share).
4. Based on your research, which investment would you recommend to Mary Goldbery? Why?
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Loose Leaf for Personal Finance
- John Tye has just been hired as the new corporate finance analyst at I-Ell Enterprises and has received his first assignment. John is to take the $25 million in cash received from a recent divestiture and use part of these proceeds to retire an outstanding $10 million bond issue and the remainder to repurchase common stock. However, the bond issue cannot be retired for another two years. If John can place the funds necessary to retire this $10 million debt into an account earning 6 percent compounded monthly,how much of the $25 million remains to repurchase stock?arrow_forwardYour friend told you that she invested $1,000 in a portfolio of large-company stocks 5 years ago and also reinvested the dividends. Herinvestment grew to $3,456 as at today. Had she invested that same amount in a Government of Grenada bond she would have received $2,500even if she reinvested the 10 percent coupons paid on the bonds. Given this information, ]why anyone would want to invest inbonds rather than stocks?arrow_forwardBilly has 44,000 dollars to invest in a stock market. He wants to be advised on this matter, by a guy named Sam, who would do it for a fee. Sam tells Billy that there is a one-year investment that provides 13 percent interest, compounded monthly. a)What is the effective annual interest rate based on a 12 percent nominal annual rate and monthly compounding? b)Sam says that he can make the investment for a fee of 2 percent of the investment's value one year from now. if you invest 44,000 today, how much will you have at the end of one year (before Sam's fee)? c)What is the effective annual interest rate of this investment, including Sam's fee?arrow_forward
- Sheldon put $500 into a certificate of deposit at his bank. In six months the value of the CD is $620. What is his ROI? Penny invested $10,000 into the stock market. She sold the stock two days later for $13,500. What is her ROI? Leonard bought a bond for $5,000 and sold it for $5,300 four years later. What is his ROI? Howard bought a house for $250,000 and sold it for $227,000 ten years later. What is his ROI? Raj bought a tractor for $25,000 and sold it for $32,000 one year later. What is his ROI? Amy put $50 in a savings account. A year later the balance on the account is $58. What is her ROI?arrow_forwardSamantha told you that she invested $1,000 in a portfolio of large-company stocks five years ago and reinvested the dividends. Her investment grew to $3,456 as of today. Had she invested that same amount in a Government of Antigua bond she would have received $2,500 even if she reinvested the 10% coupons paid on the bonds. Given this information, why anyone would want to invest in bonds rather than stocks?arrow_forwardStefani German, a 40-year-old woman, plans to retire at age 65, and she wants to accumulate $420,000 over the next 25 years to supplement the retirement programs provided by the federal government and her employer. She expects to earn an average annual return of about 6% by investing in a low-risk portfolio containing about 20% short-term securities, 30% common stock, and 50% bonds. Stefani currently has $32,620 that at an annual rate of return of 6% will grow to about $140,000 by her 65th birthday (the $140,000 figure is found using time value of money techniques, Chapter 4 Appendix.) Stefani consults a financial advisor to determine how much money she should save each year to meet her retirement savings objective. The advisor tells Stefani that if she saves about $18.23 each year, she will accumulate $1,000 by age 65. Saving 5 times that amount each year, $91.15, allows Stefani to accumulate roughly $5,000 by age 65. a. How much additional money does Stefani need to…arrow_forward
- EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENT