Please provide a detailed response: #3 Grandpa Russ thinks he needs a fixed income for the next 10 years. He currently has $10,000 in CDs, which are maturing at the end of this month. The CDs can be renewed for one year at 4 ½ percent. Russ calls his broker, Ben Seller, and learns that his $10,000 can be put to better use by purchasing debentures issued by Grab-n-Run, Inc. These bonds are 10-year bonds with a coupon rate of 8 percent, which is paid semiannually. The current market interest rate is 6 percent for bonds of a similar nature. The broker tells Grandpa Russ that he may buy each bond for $1,400. Grandpa knows that he must pay a premium, but he believes that a $400 premium is too high.
Please provide a detailed response:
#3 Grandpa Russ thinks he needs a fixed income for the next 10 years. He currently has $10,000 in CDs, which are maturing at the end of this month. The CDs can be renewed for one year at 4 ½ percent. Russ calls his broker, Ben Seller, and learns that his $10,000 can be put to better use by purchasing debentures issued by Grab-n-Run, Inc. These bonds are 10-year bonds with a coupon rate of 8 percent, which is paid semiannually. The current market interest rate is 6 percent for bonds of a similar nature. The broker tells Grandpa Russ that he may buy each bond for $1,400. Grandpa knows that he must pay a premium, but he believes that a $400 premium is too high.
- What is the maximum price you should tell Grandpa to pay for each bond?
- Compare the risk of the CD with the risk of the bond.
- What else would you advise Grandpa with regard to this type of investment?
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