Stephanie Carter has been gifted a sum of $50,000 by her grandparents on completing her graduation successfully. She is a fresh finance graduate and is excited to invest some money in the capital market, for which she intends to use the gifted sum of $50,000. However, instead of committing this money to the market immediately, she decides to wait for some time, work in the field and acquire some experience before proceeding with her intended investment. She thus contemplates an extremely conservative investment in a portfolio of stocks and bonds, at the start of year 5 from now. For now, she will leave the $50,000 in a fixed deposit with the bank which promises an interest rate of 6% per annum. She will require a return of at least 9% on her stock investments and 4% on bond investments. Stephanie would have to pay 25% taxes on any interest income. Dividends will be tax-free. Stephanie’s research has allowed her to narrow down on the following investment candidates: Bonds: 1. Pleasant Innovations Ltd. had issued a series of 20-year bonds at 98% of face value (assume face value = $100). These bonds come with a coupon rate of 3% and will be paid semi-annually. By the start of year 5 from now, 5 years would have passed. Assume that the YTM remains constant over time. 2. D Right Side Inc. will offer a coupon of 4% per annum on its much awaited 20-year bonds. By the start of year 5 from now, these bonds would be 2 years old and would likely sell for a price of $70 per bond (face value = $100). Coupons would be paid annually. Assume that the YTM will remain constant over time. 3. Tried and tested Ltd. has bond issue with an after-tax YTM of 6%. 5 years from now, they have 25 years left to mature and offer a coupon rate of 8% paid annually. These bonds have a face value of $1,000 each. Stephanie wants her portfolio to be distributed approximately 5-95 between stocks and bonds such that around 5% (±3%) of her investable funds are allocated to stocks and 95% (±3%) to bonds. Her investment criteria further specify that: 100 units of each acceptable bonds be purchased. Question : What will be the total cost of investment in bonds? What will be the total cost of investment in bonds?
Stephanie Carter has been gifted a sum of $50,000 by her grandparents on completing her graduation successfully. She is a fresh finance graduate and is excited to invest some money in the capital market, for which she intends to use the gifted sum of $50,000. However, instead of committing this money to the market immediately, she decides to wait for some time, work in the field and acquire some experience before proceeding with her intended investment. She thus contemplates an extremely conservative investment in a portfolio of stocks and bonds, at the start of year 5 from now. For now, she will leave the $50,000 in a fixed deposit with the bank which promises an interest rate of 6% per annum.
She will require a return of at least 9% on her stock investments and 4% on bond investments. Stephanie would have to pay 25% taxes on any interest income. Dividends will be tax-free. Stephanie’s research has allowed her to narrow down on the following investment candidates:
Bonds: 1. Pleasant Innovations Ltd. had issued a series of 20-year bonds at 98% of face value (assume face value = $100). These bonds come with a coupon rate of 3% and will be paid semi-annually. By the start of year 5 from now, 5 years would have passed. Assume that the YTM remains constant over time.
2. D Right Side Inc. will offer a coupon of 4% per annum on its much awaited 20-year bonds. By the start of year 5 from now, these bonds would be 2 years old and would likely sell for a price of $70 per
3. Tried and tested Ltd. has bond issue with an after-tax YTM of 6%. 5 years from now, they have 25 years left to mature and offer a coupon rate of 8% paid annually. These bonds have a face value of $1,000 each.
Stephanie wants her portfolio to be distributed approximately 5-95 between stocks and bonds such that around 5% (±3%) of her investable funds are allocated to stocks and 95% (±3%) to bonds. Her investment criteria further specify that:
100 units of each acceptable bonds be purchased.
Question : What will be the total cost of investment in bonds?
What will be the total cost of investment in bonds?
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Regarding question 4. can you calculate the Bond value for pleasant Innovation? the question never indicated not to include it but rather to choose the best out of 3 that can be invested in.
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