Assignment Week 4 3

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.

Order a unique copy of this paper
(550 words)

Approximate price: $22

Basic features
  • Free title page and bibliography
  • Unlimited revisions
  • Plagiarism-free guarantee
  • Money-back guarantee
  • 24/7 support
On-demand options
  • Writer’s samples
  • Part-by-part delivery
  • Overnight delivery
  • Copies of used sources
  • Expert Proofreading
Paper format
  • 275 words per page
  • 12 pt Arial/Times New Roman
  • Double line spacing
  • Any citation style (APA, MLA, Chicago/Turabian, Harvard)

Our guarantees


We value our customers, and so ensure that our papers are 100 percent original. Our Team of professionals does not miss the mark; they ensure that step by step each paper is written uniquely. We never duplicate or work as we compare papers rest assured. We deliver our work a day before time to ensure that you don’t miss your deadlines. It is not only doing the work but delivering it at the right time. We capture the consequences of late remittances. .

Money-back guarantee

We value customer satisfaction here at popularessaywriters.com and make sure that you get the best value for your Money. It happens that sometimes you can pay twice for your order or may want to cancel it, or you feel that it doesn’t meet your requirements; our money back guarantee will give you the opportunity to get back your money. We will also refund 100% of money paid double. In case your paper does not satisfy your requirements , we request that you notify us via writing within 2 days otherwise on the third day we will assume that you have been satisfied. Do all your correspondences through our email address popularessaywriters@gmail.com.

Read more

Zero-plagiarism guarantee

At popularessaywriters.com, our professional writers know the consequence plagiarism does for our clients. We have updated software’s such as article checker and copyscape to check for originality of the custom papers before submission of the final paper to the you. Our guarantee to the customer is that we will write 100% original papers for them that are quality, timely and of low cost. We have experienced professional and competent PhD writers who will write quality custom papers for you..

Read more

Free-revision policy

. At popularessaywriters.com, we are proud to provide top-quality Essay writing service to our esteemed customers. We are ready to take up that challenging academic assignment that is giving you sleepless nights and simplify it for you according to your desired requirements. We are willing to revise your paper if it does not meet your requirements. At popularessaywriters.com, we do not compromise with quality; thus, we offer unlimited free revisions until the customer is satisfied with their custom paper. Our unlimited free revision services are provided under the following terms:.. .

Read more

Privacy policy

Popularessawriters.com knows that client’s information is an essential tool for our company. It means that whatever the client requests from our service is kept strictly confidential. It means that whoever writes for this company understands the terms and conditions hence you should not be worried because you will never see your work somewhere else...

Read more

Fair-cooperation guarantee

Rest assured that we will always be attentive to your needs and requirements. We belief in the phrase treat your neighbour as you would want them to treat you. We leave nothing to chance and always look forward to a good interaction with each other.. .

Read more

Calculate the price of your order

550 words
We'll send you the first draft for approval by September 11, 2018 at 10:52 AM
Total price:
$26
The price is based on these factors:
Academic level
Number of pages
Urgency