FIN 3501 FIN3501 Week 8 Individual Work Bonds (Everest University)
FIN 3501 Week 8 Individual Work Bonds (Everest University)
1. Bell Corp. issues a bond with the following features:
|
Principal |
$1,000 |
|
Coupon |
0% |
|
Maturity |
5 years |
The current interest rate on comparable debt is 7 percent, so the bond initially sells for $713. What is the accrued interest on the bond for each of the next five years?
2. You purchase a 6 percent $10,000 bond for $9,180 plus $156 in accrued interest for a total outlay of $9,336. Subsequently you receive a $300 interest payment. You are in the 20 percent income tax bracket. How much tax do you owe on the interest payment?
3. You sell a 6 percent $10,000 bond for $9,180 plus $156 in accrued interest for a total of $9,336. Soon thereafter the company makes a $300 interest payment. You are in the 20 percent income tax bracket.
4. Molly Matters Inc. issues a split-coupon $1,000 bond that matures in seven years. Interest payments are $80 a year (8 percent) and start after three years have lapsed. The bond initially sells for a discounted price of $794.
The Financial Advisor’s Investment Case:
1. What are the primary differences between investments in corporate stock versus corporate bonds?
2. Since bonds pay interest, does that imply the individual’s risk exposure is less for investing in bonds rather than stock?
3. What are the mechanics of purchasing bonds? May the investor leave the bonds with his or her broker?
4. Since a bond has a maturity date, does that imply the investor holds the bond to maturity?
5. Can the investor expect to earn higher returns on a firm’s bonds than on its stock?
6. Are high-yield securities an acceptable investment for an investment club or its members? The questions obviously cover many facets to consider when investing in bonds. You believe that the presentation will be improved if you also illustrate bond investments as part of a tax-deferred retirement account or a means to achieve diversification, so you pose these additional questions:
7. From a tax perspective, which should an investor acquire for a retirement account: a firm’s stock or its bonds?
8. If an individual owns stock and acquires bonds issued by the same company, does the purchase diversify the investor’s portfolio?
9. How does an individual construct a diversified bond portfolio? How can an investor use bonds to help diversify the total portfolio?
