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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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Chapter 15 Solutions
GEN COMBO PERSONAL FINANCE; CONNECT ACCESS CARD
- Your 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, critically discuss why anyone would want to invest inbonds rather than stocks? Further explain why the price of many individual stocks still go down, even when the overall stock market goes up.How can you avoid the value of your stock from going down?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, critically discuss why anyone would want to invest inbonds rather than stocks?arrow_forwardSheldon 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_forward
- Lancaster Corporation, an investment banking company, often has extra cash to invest. Suppose Lancaster buys500 shares of Knight Corporation stock at $40 per share, representing less than 5% of Knight’soutstanding stock. Lancaster expects to hold the Knight stock for one month and then sell it.The purchase occurs on December 15, 2018. On December 31, the market price of one share ofKnight stock is $47 per share.Requirements1. What type of investment is this for Lancaster? Give the reason for your answer.2. Record Lancaster’s purchase of the Knight stock on December 15 and the adjustment tomarket value on December 31.3. Show how Lancaster would report this investment on its balance sheet at December 31 andany gain or loss on its income statement for the year ended December 31, 2018arrow_forwardA 22-year-old engineering graduate wants to accumulate $2,000,000 to be available when she retires 40 years from today. She investigates several investment options and decides to invest in a stock market index fund after discovering that the long-term average return for the stock market is 10.4% per year. Because this will be a tax-sheltered account, she plans to ignore the impact of taxes. Solve, a. If she plans to make 40 uniform annual deposits starting 1 year from today, what is the dollar amount of the required deposits? b. If she makes the first of the 40 deposits starting today rather than 1 year from today, what is the dollar amount of the required deposits? c. If she plans to make the first payment 1 year from today and each annual payment will be $200 greater than the previous year’s payment, i. What is the dollar amount of the first deposit? ii. What is the dollar amount of the last deposit? d. If she plans to make the first payment 1 year from today and each annual payment…arrow_forwardAvi Erlander currently holds corporate bonds yielding six percent and government bonds yielding four percent. He is fascinated by the world of finance and is always on the lookout for higher yields. In 2021, VanCanada Airlines issued 20-year bonds paying a yield of 12 percent. Mr. Erlander called Joanne, a financial analyst, for information. She mentioned that VanCanada Airlines has a low credit rating, compounded by the damage done to the industry because of the global pandemic. Avi is excited to purchase VanCanada Airline bonds because of the potential return and does not seem phased by his conversation with Joanne. Required: Assume the bonds are 20-years and have a maturity value of $1,000. What would the price of bonds be if poor market conditions increased the yield of the bonds to 15 percent in two years from now? (Annual analysis) Compare the decline in value calculated in part (a) to the initial interest advantage over Avi’s government bonds. Does Avi come out ahead or…arrow_forward
- You are an accountant for Davanzo Company. The president of the company calls you into her office and says, “I want to ask you about two issues. First, we need to sell one of our investments to raise $1 million because I think I have found a better investment. We could sell the bonds of Company X, which are currently worth $1 million even though they have an amortized cost basis of $950,000. But I don’t want to sell them because I like the steady stream of cash flow we get related to interest. Or we could sell the bonds in that dog, Company Z. These bonds are also worth $1 million, but they cost us $1.2 million. I hate to admit we made such a big mistake, and if they can somehow avoid bankruptcy, we may actually recover our investment. And then there’s that loss. I don’t want to report that. Second, I am going to use the $1 million to buy about 20% of the shares of Company M, but I seem to remember that there is some accounting rule that might affect how much we buy. I was also…arrow_forwardCarson Company is a large manufacturing firm in Accra that was created 20 years ago by the Carson family. It wasinitially financed with an equity investment by the Carson family and 10 other individuals. Over time, Carson Companyhas obtained substantial loans from finance companies and commercial banks. The interest rate on the loans is tied to themarket interest rate and is adjusted every six months. Thus, Carson’s cost of obtaining funds is sensitive to interest ratemovements. It has a credit line with a bank in case it suddenly needs additional funds for a temporary period. It haspurchased Treasury securities that it could sell if it experiences any liquidity problems.Carson Company has assets valued at about 50 million cedis and generates sales of about 100 million cedis per year. Someof its growth is attributed to its acquisitions of other firms. Because of its expectations of a strong Ghanaian economy,Carson Company plans to grow in the future by expanding its business by making…arrow_forwardThe company has $60,000 to invest. The investment manager proposed two options. Option (A) is to invest in municipal bonds paying 7% annual interest. Option (B) is to invest in a corporate bond paying 9.5% annual interest. Both investments have similar risks. Assume that Pioneer has 15% marginal tax rate. The investment manager recommended to invest the money in municipal bonds. Why in your opinion, the investment manager selected option (A)? What is your recommendation to Pioneer? And why? Would your recommendation change if you apply implicit and explicit tax concepts for the above proposal? And whyarrow_forward
- Carlos purchased 2,000 shares of a common stock last June 2017 for Php 3,200,000. In June 2018, he then sold 1,000 shares of the common stock for Php 1,800 per share. The remaining 1,000 shares were finally sold for Php 2,000 per share in June 2019. What was the ERR on this investment if the external reinvestment rate is 8% per year? Write also the complete given.arrow_forwardAn investor spends $25,000 for corporate bonds of another company late in Year One. The bonds are worth $26,000 at the end of that year on the open market. Early in Year Two, $1,300 in interest is received from this investment. Shortly thereafter, the debt investment is sold for $27,000. If this asset is an investment in trading debt securities, what is the impact on net income in Year Two? O Increase by $4,300. O Increase by $3,300. O Increase by $1,300. O Increase by $2,300.arrow_forwardA woman wishes to invest $14,000 in three types of bonds: municipal bonds paying 8% interest per year, bank investment certificates paying 9%, and high-risk bonds paying 13%. For tax reasons she wants the amount invested in municipal bonds to be at least three times the amount invested in bank certificates. To keep her level of risk manageable, she will invest no more than $4000 in high-risk bonds. How much should she invest in each type of bond to maximize her annual interest yield? [Hint: Let x = amount in municipal bonds and y = amount in bank certificates. Then the amount in high-risk bonds will be $14,000 − x − y.] municipal bonds $______ bank certificates $______ high-risk bonds $______arrow_forward
