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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Personal Finance, FIN 2100 Kapoor 12th edition, University of Central Florida
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