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Stocks and Bonds Current Yields

A new client, Dr. Washington, has demonstrated a particular thirst for knowledge of stocks and bonds and has asked that you put together an example of these investments to illustrate how they work.
Calculate the returns on the following investments (include the US$ and percent) to illustrate how they work.
1. A stock that does not pay a dividend of which you buy 100 shares for $25.00 per share and sell the 100 shares for $27.50 a year later. You pay the $50.00 commission when you sell the securities.
2. A 5-year bond that you purchase for US$1,000 pays a 6% yearly rate. It is paid semiannually, and you hold the bond until maturity.
3. The current yield on a bond that is priced at $89 has a 6% coupon.
4. The yield-to-maturity (YTM) on a 7.25% ($1,000 par value) bond that has 10 years remaining to maturity, currently trading in the market at $825.
5. The holding period return (HPR) for 1,000 shares of a no-load mutual fund currently selling at a NAV of $11, purchased a year ago at a NAV of $10.50/share, including $300 of distributed investment income dividends and capital gains dividends of $350.
After you have shared some basic information with Dr. Washington about the different types of investments, he also wants you to explain the differences between the different types of bondsâ?"from investment grade to high yield. Explain the various ratings that bonds can get and explain the two major rating agencies.
Assignment Guidelines:
Perform the 5 calculations listed in the Assignment Description.
o You must show all of your work as well as any formulas that you used.
o If you used MS Excel to arrive at your answers, then you must provide an explanation of your methodology.
Next, answer the following questions for Dr. Washington:
o What are the different types of investments a person can make?
o What are the differences between the various types of bonds?
o What do bond ratings indicate, and what 2 major agencies are in charge of assigning these ratings?
Compile your calculations, MS Excel tables and explanations (if applicable), and your answers to the 3 questions above into a single Word document.

Solution Preview

See the attached file. Thanks

A new client, Dr. Washington, has demonstrated a particular thirst for knowledge of stocks and bonds and has asked that you put together an example of these investments to illustrate how they work.

Calculate the returns on the following investments (include the US$ and percent) to illustrate how they work.

1. A stock that does not pay a dividend of which you buy 100 shares for $25.00 per share and sell the 100 shares for $27.50 a year later. You pay the $50.00 commission when you sell the securities.

Dollar Return:
Purchase Value = 100*$25=$2,500
Sell Value = 100*$27.50=$2,750
Commission = $50
Dollar Return = Sell Value - Purchase Value - Commission
=$2,750 - $2,500 - $50
= $200

Percent Return:
Percent Return = Dollar Return / Purchase Value =$200/$2500 = 0.08 or 8.00%

2. A 5-year bond that you purchase for US$1,000 pays a 6% yearly rate. It is paid semiannually, and you hold the bond until maturity.

Dollar Return:
Coupon Payment = Par Value of Bond * Coupon Rate / Coupon payment frequency
Coupon Payment =$1000*6%/2=$30
No of Coupon Payments = Coupon payment frequency * Time to maturity for bond
No of Coupon Payments =2*5=10
Total Dollar return = No. of coupon payments * Coupon payment = 10*$30=$300

Percent Return:
Percent Return = 6% annual

3. The current yield on a bond that is priced at $89 has a 6% coupon.

Dollar Return:
Coupon Payment = Par Value of Bond * Coupon Rate / Coupon payment frequency
Coupon Payment =$100*6%=$6
Current yield in dollars = Coupon payment = $6.00

Percent Return:
Percent Return = Coupon payment / current price = $6.00/$89.00=0.0674 or 6.74%

4. The yield-to-maturity (YTM) on a 7.25% ($1,000 par value) bond that has 10 years remaining to maturity, currently trading in the market at $825.

Dollar Return:
Coupon Payment = Par Value of Bond * Coupon Rate / Coupon ...

Solution Summary

The stocks and bonds current yields are examined.

$2.19