Case Problem 11.1 The Bond Investment Decisions of Dave and Marlene Carter

Assignment Week 4 3

Case Problem 11.1 The Bond Investment Decisions of Dave and Marlene Carter
Dave and Marlene Carter live in the Boston area, where Dave has a successful orthodontics practice. Dave and Marlene have built up a sizable investment portfolio and have always had a major portion of their investments in fixed-income securities. They adhere to a fairly aggressive investment posture and actively go after both attractive current income and substantial capital gains. Assume that it is now 2016 and Marlene is currently evaluating two investment decisions: one involves an addition to their portfolio, the other a revision to it.

The Carters’ first investment decision involves a short-term trading opportunity. In particular, Marlene has a chance to buy a 7.5%, 25-year bond that is currently priced at $852 to yield 9%; she feels that in two years the promised yield of the issue should drop to 8%.

The second is a bond swap. The Carters hold some Beta Corporation 7%, 2029 bonds that are currently priced at $785. They want to improve both current income and yield to maturity and are considering one of three issues as a possible swap candidate: (a) Dental Floss, Inc., 7.5%, 2041, currently priced at $780; (b) Root Canal Products of America, 6.5%, 2029, selling at $885; and (c) Kansas City Dental Insurance, 8%, 2030, priced at $950. All of the swap candidates are of comparable quality and have comparable issue characteristics.

Questions
a. Regarding the short-term trading opportunity:

1. What basic trading principle is involved in this situation?
2. If Marlene’s expectations are correct, what will the price of this bond be in two years?
3. What is the expected return on this investment?
4. Should this investment be made? Why?

b. Regarding the bond swap opportunity:

1. Compute the current yield and the promised yield (use semiannual compounding) for the bond the Carters currently hold and for each of the three swap candidates.
2. Do any of the swap candidates provide better current income and/or current yield than the Beta Corporation bonds the Carters now hold? If so, which one(s)?
3. Do you see any reason why Marlene should switch from her present bond holding into one of the other issues? If so, which swap candidate would be the best choice? Why?

Assignment Week 4

Dave and Marlene Carter live in the Boston area, where Dave has a successful orthodontics practice. Dave and Marlene have built up a sizable investment portfolio and have always had a major portion of their investments in fixed-income securities. They adhere to a fairly aggressive investment posture and actively go after both attractive current income and substantial capital gains. Assume that it is now 2010 and Marlene is currently evaluating two investment decisions: one involves an addition to their portfolio, the other a revision to it.

The Carters’ first investment decision involves a short-term trading opportunity. In particular, Marlene has a chance to buy a 7.5%, 25-year bond that is currently priced at $852 to yield 9%; she feels that in two years the promised yield of the issue should drop to 8%.

Questions

a. Regarding the short-term trading opportunity:

1. What basic trading principle is involved in this situation?

Trading on forecasted interest rate behavior

1. If Marlene’s expectations are correct, what will the price of this bond be in two years?

852*.09=76.68 76.68/.08=958.50

1. What is the expected return on this investment? Excel
2. Should this investment be made? Why?

I will now discuss whether I believe this investment should be made or not. I believe this investment should be made because there are good returns and interest rates and she believes the bond price will go up and NPV remains steady at more than 7.5%. As long as everything she forecast goes correctly as she thinks it will it should be a good investment, but she needs to remember that this is not a certain thing and things could easily go different then she predicted; this happens all the time. The fact that the yield is dropping is good sign that the bond is doing good and is considered a good thing because the bond price is going up. In conclusion after solving all the equations I think this investment should be made.

The second is a bond swap. The Carters hold some Beta Corporation 7%, 2023 bonds that are currently priced at $785. They want to improve both current income and yield-to-maturity, and are considering one of three issues as a possible swap candidate: (a) Dental Floss, Inc., 7.5%, 2035, currently priced at $780; (b) Root Canal Products of America, 6.5%, 2023, selling at $885; and (c) Kansas City Dental Insurance, 8%, 2024, priced at $950. All of the swap candidates are of comparable quality and have comparable issue characteristics.

b. Regarding the bond swap opportunity:

1. Compute the current yield and the promised yield (use semiannual compounding) for the bond the Carters currently hold and for each of the three swap candidates. Excel

Current Yield

70/785=.089

75/780=.096

65/885=.073

80/950=.084

BP=785=70/(1+.089)^1+70/(1+.089)^2+70/(1+.089)^3+70/(1+.089)^4+70/(1+.089)^5+70/(1+.089)^6+70/(1+.089)^7+70/(1+.089)^8+70/(1+.089)^9+70/(1+.089)^10+70/(1+.089)^11+70/(1+.089)^12+70/(1+.089)^13+70/(1+.089)^14+70/(1+.089)^15+70/(1+.089)^16+70/(1+.089)^17+70/(1+.089)^18+70/(1+.089)^19+70/(1+.089)^20+70/(1+.089)^21+70/(1+.089)^22+70/(1+.089)^23+1000/(1+.089)^23=816.5584056

BP=780=75/(1+0.096)^1+75/(1+0.096)^2+75/(1+0.096)^3+75/(1+0.096)^4+75/(1+0.096)^5+75/(1+0.096)^6+75/(1+0.096)^7+75/(1+0.096)^8+75/(1+0.096)^9+75/(1+0.096)^10+75/(1+0.096)^11+75/(1+0.096)^12+75/(1+0.096)^13+75/(1+0.096)^14+75/(1+0.096)^15+75/(1+0.096)^16+75/(1+0.096)^17+75/(1+0.096)^18+75/(1+0.096)^19+75/(1+0.096)^20+75/(1+0.096)^21+75/(1+0.096)^22+75/(1+0.096)^23+1000/(1+0.096)^23=807.8147245

BP=885=65/(1+0.073)^1+65/(1+0.073)^2+65/(1+0.073)^3+65/(1+0.073)^4+65/(1+0.073)^5+65/(1+0.073)^6+65/(1+0.073)^7+65/(1+0.073)^8+65/(1+0.073)^9+65/(1+0.073)^10+65/(1+0.073)^11+65/(1+0.073)^12+65/(1+0.073)^13+65/(1+0.073)^14+65/(1+0.073)^15+65/(1+0.073)^16+65/(1+0.073)^17+65/(1+0.073)^18+65/(1+0.073)^19+65/(1+0.073)^20+65/(1+0.073)^21+65/(1+0.073)^22+65/(1+0.073)^23+1000/(1+0.073)^23=912.0866784

BP=950=80/(1+.084)^1+80/(1+.084)^2+80/(1+.084)^3+80/(1+.084)^4+80/(1+.084)^5+80/(1+.084)^6+80/(1+.084)^7+80/(1+.084)^8+80/(1+.084)^9+80/(1+.084)^10+80/(1+.084)^11+80/(1+.084)^12+80/(1+.084)^13+80/(1+.084)^14+80/(1+.084)^15+80/(1+.084)^16+80/(1+.084)^17+80/(1+.084)^18+80/(1+.084)^19+80/(1+.084)^20+80/(1+.084)^21+80/(1+.084)^22+80/(1+.084)^23+1000/(1+.084)^23=959.8301109

1. Do any of the three swap candidates provide better current income and/or current yield than the Beta Corporation bonds the Carters now hold? If so, which one(s)?

Two of the swap candidates provide better income and yield than the Beta Corporation Bonds they currently hold. Root Canal Products of America provides a better yield then the Beta Corporation bonds they currently hold. Root Canal Products of America offers a promised yield of 912, while the Beta Corporation offers a promised yield of 817. Kansas City Dental Insurance also offers a higher yield then their current bond. It offers a promised yield of 960, which is higher, then, their current bond. Lastly Dental Floss Inc. offers a higher current yield, but its promised yield is lower then that of their current bond.

1. Do you see any reason why Marlene should switch from her present bond holding into one of the other three issues? If so, which swap candidate would be the best choice? Why?

I believe Marlene should switch from her present bond holding into one of the other three issues. This is because they offer a higher yield and current income opportunity. The one I would suggest is Kansas City Dental Insurance. This is because it offers the highest promised yield and its current yield is just a little bit lower then that of its current bond.

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Case Problem 10.1 Max and Veronica Develop a Bond Investment Program

Max and Veronica Shuman, along with their teenage sons, Terry and Thomas, live in Portland, Oregon. Max is a sales rep for a major medical firm, and Veronica is a personnel officer at a local bank. Together they earn an annual income of around $100,000. Max has just learned that his recently departed rich uncle has named him in his will to the tune of some $250,000 after taxes. Needless to say, the family is elated. Max intends to spend $50,000 of his inheritance on a number of long-overdue family items (like some badly needed remodeling of their kitchen and family room, the down payment on a new Porsche Boxster, and braces to correct Tom’s overbite). Max wants to invest the remaining $200,000 in various types of fixed-income securities.

Max and Veronica have no unusual income requirements or health problems. Their only investment objectives are that they want to achieve some capital appreciation, and they want to keep their funds fully invested for at least 20 years. They would rather not have to rely on their investments as a source of current income but want to maintain some liquidity in their portfolio just in case.

Questions

a. Describe the type of bond investment program you think the Shuman family should follow. In answering this question, give appropriate consideration to both return and risk factors.

b. List several types of bonds that you would recommend for their portfolio and briefly indicate why you would recommend each.

c. Using a recent issue of the Wall Street Journal, Barron’s, or an online source, construct a $200,000 bond portfolio for the Shuman family. Use real securities and select any bonds (or notes) you like, given the following ground rules:

1. The portfolio must include at least one Treasury, one agency, and one corporate bond; also, in total, the portfolio must hold at least five but no more than eight bonds or notes.
2. No more than 5% of the portfolio can be in short-term U.S. Treasury bills (but note that if you hold a T-bill, that limits your selections to just seven other notes/bonds).
3. Ignore all transaction costs (i.e., invest the full $200,000) and assume all securities have par values of $1,000 (although they can be trading in the market at something other than par).
4. Use the latest available quotes to determine how many bonds/notes/bills you can buy.

d. Prepare a schedule listing all the securities in your recommended portfolio. Use a form like the one shown below and include the information it calls for on each security in the portfolio.

e. In one brief paragraph, note the key investment attributes of your recommended portfolio and the investment objectives you hope to achieve with it.

Security

Latest Quoted Price

Number of Bonds Purchased

Amount Invested

Annual Coupon Income

Current Yield

Issuer-Coupon-Maturity

Example: U.S. Treas – 8½%-’18

1468/32

15

$21,937.50

$1,275

5.81%

1.

2.

3.

4.

5.

6.

7.

8.

Totals

—

$200,000.00

$  

%  

Bond: Bond are almost similar to stocks. Just like stocks, bonds also provide regular incomes

and capital gains to the investors. But on comparison with stocks, one can say that bonds are

less risky and provide high current Income.

(a)

Risk: Risk is nothing but the possibility that an actual outcome of an action varies from expected

outcome.

Return: Return is the compensation for baring risk and forgoing alternative investments

opportunities.

There is a direct relationship between Risk and Return. The more risk an investor under takes,

the more return he would expect. Say for example, An investor may be satisfied with less return

on a portfolio ranging from 1 year to 2 year gestation period but the same investor expect more

return if the gestation period is more than 10 years. This is because, Risk increases along with

the gestation period.

The only way in which an investor can reduce his risk is, by diversifying it. Say, if a portfolio

consist shares of 10 different countries, then even if one company underperforms such a loss

can be compensated with the better performance of other companies.

So, Shuman’s Family must follow a long Term, highly diversified and high return portfolio with an

investment objective of Capital appreciation, without obstructing the Ground rule of liquidity.

(b)

The following bonds fit the bid and suitable to the requirements:

(1) Treasury Bonds: The maturity period of these bonds lies between 2 to 3 years. By their

basic nature these bonds are marked as “full faith and credit” by U.S government. Such a

marking makes the bond very liquid in domestic and foreign market.

These bonds are very helpful for the investors who are concerned about the liquidity of the bonds

and risk averse.

Check list to match the requirement:

Whether suitable for long term investments?

Yes.

Whether liquid in nature?

Yes.

Scope for capital appreciation?

Varies.

Repayment guarantee?

Yes.

Tax advantage (with respect to periodic payments)?

No

(2) Zero Coupon Bonds: These bonds do not fetch periodic regular income but they fetch

capital gain. These bonds are issued at Discount and redeemed at par value or premiun.

The advantage of these kinds of bonds is, once the investor makes up his mind regarding capital

investment in zero coupon bonds, he need not worry about reinvestment of periodic returns till

the maturity period.

(2) Zero Coupon Bonds: These bonds do not fetch periodic regular income but they fetch

capital gain. These bonds are issued at Discount and redeemed at par value or premiun.

The advantage of these kinds of bonds is, once the investor makes up his mind regarding capital

investment in zero coupon bonds, he need not worry about reinvestment of periodic returns till

the maturity period.

Check list to match the requirement:

Whether suitable for long term investments?

Yes.

Whether liquid in nature?

Yes.

Scope for capital appreciation?

Yes.

Repayment guarantee?

Yes.

Tax advantage (with respect to periodic payments)?

No.

Note: Even though there is no actual interest income, Bond holders are liable to pay tax based on

Concept of ‘accrual Income’.

(3) Municipal Bonds: These bonds are generally issues by the state governments, local

authorities and political sub divisions. The peculiar feature of these bonds is that, a person other

than issuer undertakes to pay the bond holder in case of default on the part of issuer with respcet

to both the ‘periodic income’ and ‘capital appreciation’.

Check list to match the requirement:

Whether suitable for long term investments?

depends

Whether liquid in nature?

Yes.

Scope for capital appreciation?

Very less

Repayment guarantee?

Yes.

Tax advantage (with respect to periodic payments)?

Yes.

(4) Agency Bond: They are similar to treasury bonds. These Bonds are issued by organisations

and agencies of US government. The main difference between Treasury bonds and Agency

bonds is that, US treasury do not accept the obligation of Agency Bonds. The peculiar feature of

these bonds is that, the holders do not physically possess the ownership certificate.

Check list to match the requirement:

Whether suitable for long term investments?

depends

Whether liquid in nature?

Comparatively less.

Scope for capital appreciation?

Yes.

Repayment guarantee?

No.

Tax advantage (with respect to periodic payments)?

No.

The following types of bonds are not suitable due to the following reasons:

Name of

the Bond:

Reasons:

Mortgaged

Backed

Securities.

By the very nature of these securities, investors receive part of capital investment

in the form of periodic returns. It would tend to capital appropriation rather than

capital appreciation.

Hence not suitable for Shumans family.

Asset

Backed

Securities.

These securities’ are useful for short-term investments only. The maturity period

generally falls below 5 years.

Hence not suitable for Shumans family.

Corporate

Bonds.

Maturity period ranges between 25 to 40 years.

Hence not suitable for Shumans family.

Conclusion: Out of all different types of the above mentioned bonds, Zero Coupon Bonds best

serve the requirements of Shuman family on the following counts.

Requirements of Shumans family

Feature of zero Coupon

Bond

Shumans family is not expecting regular income but capital

appreciation

Pay nothing till issue matures

Shumans family is concerned about Liquidity

Highly liquid

Shumans family is planning to invest for 20 long years

Suitable for long term

investments.

(c)

We can construct profolio with given $200,000 in the following manner.

Security: Investments:

10%Treasury bond -$13,800

Agency bond -$25100

Corporate bond -$11500

Municipal Bond -$37200

Zero Coupon Bonds -$112400

Total -$200000

(d)

Compute annual coupon income for 10% treasury bonds:

=Par valueNumber of shares purchasedCoupoun rate

=$10001010%

=$1000100.1

=$1000

Follow the same methodology for all remaining bonds.

Security

Price

per lot.

Assume, each lot

consists 100 units.

Always on

Market Price.

Always on Par

Value of 1000$

income/price

Latest

Price

($)

Number of Bonds

Purchased.

($)

Amount

Invested.

($)

Annual Coupon

Income

($)

Current

Yield.

(%)

10%Treasury

bond

1,380.00

10

13,800

1,000

0.72

Agency bond

1,255.00

20

25,100

2,000

1.59

Corporate

bond

1,150.00

10

11,500

1,000

0.86

Municipal

Bond

1,240.00

30

37,200

3,000

2.41

Zero Coupon

Bonds.

802.85

140

112,400

NA

0.00

Total

200000

5.60

(e)

The main objective of the investment portfolio is “Capital Appreciation’. Capital appreciation is a

stated goal of all mutual funds and diversified portfolio. It is a rise in the asset value based on the

market price. An increase of a fund investment rising gradually based on the market price. The

capital appreciation is in the form of dividend and interest income etc.

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Textbook Case Problems —Please See Attachments

Assignment Content

Complete the following Case Problems from Fundamentals of Investing:

Case Problem 10.1: Max and Veronica Develop a Bond Investment Program, Questions A-E (page 422)

Case Problem 10.2: The Case of the Missing Bond Ratings, Questions A-C (page 423)

Case Problem 11.1: The Bond Investment Decisions of Dave and Marlene Carter, Questions A-B (page 463)

Case Problem 11.2: Grace Decides to Immunize Her Portfolio, Questions A-F (page 464).

Format your submission consistent with APA guidelines.

Submit your assignment.

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Review the example of a Discussion post and response found in this week’s Learning Resources as well as the Discussion Rubric to understand the Discussion’s expectations.

Developmental psychology attempts to understand cognitive, physical, and social-emotional development throughout the lifespan. In order to understand, for example, how maternal stress during pregnancy might impact the child later in life, pregnant women and children could be studied. Vulnerable populations, such as pregnant women, newborns, children, cognitively impaired individuals, incarcerated individuals, or older adults, require additional consideration and protection when planning to conduct research with them.

When conducting research in the field of human development, particularly with vulnerable populations, it is important to keep in mind that a unique set of ethical considerations should be taken into account. These populations need extra care to ensure their rights because some individuals may lack the mental capacity to give informed consent, may have decreased free will, or may be vulnerable in terms of their physical or mental welfare. As you approach this Discussion, keep in mind how ethical considerations might have affected the type of research that could be conducted.

For this Discussion, you will examine the role of ethics in developmental psychology research as it relates to vulnerable populations.

To prepare for this Discussion:

Review the example of a Discussion post and response found in this week’s Learning Resources as well as the Discussion Rubric to understand the Discussion’s expectations.

Review the Learning Resources related to ethics and research in the field of developmental psychology

Choose a population from the following:

Children

Women who are pregnant

Geriatric individuals

Individuals with cognitive disabilities

Adolescents

By Day 4

Based on the population you selected, post an explanation of the role of ethics in developmental psychology research with attention to the characteristics of this vulnerable population. Be specific in your post and use the Learning Resources to support your post. Use proper APA format and citations to support your explanation.

By Day 6

Respond to a post from at least one of your colleagues who selected a population different from that of your Discussion post and add one additional ethical consideration.

Return to this Discussion in a few days to read the responses to your initial posting and respond to any questions. Note what you have learned and/or any insights that you have gained as a result of your colleagues’ comments.

Click on the Reply button below to reveal the textbox for entering your message. Then click on the Submit button to post your message.

I CHOSE ADOLESCENTS*

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