Purchase Solution

# Rate of return

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Scenario:

The largest retail brokerage firm in the US, America's Best Investment Company, has hired you to advise clients on investments and to meet their individual financial objectives. Your first client, Dr. Tyrone Washington, is a wealthy, young doctor with little experience in financial decision making and investments.

You want to build him a good foundation with basic investment fundamentals because Dr. Washington has little investment experience. You want to ensure his understanding of the basics of investment vehicles, how they make or lose money, and the risk associated with investing.

You want to discuss with Dr. Washington how to build an optimal portfolio of investments. Although Dr. Washington is looking at different investments, specifically stocks and bonds, he has yet to learn how to take all of his investments and build a portfolio that will meet his financial objectives.

Given the importance of analysis, you decide to focus Dr. Washington's training in investment analysis about how to gather and analyze investment information, appreciate his own risk profile, and make investment decisions that are consistent with his level of risk tolerance.

Your first two meetings with Dr. Washington went well, and he appears to have grasped the fundamentals of investment vehicles. Dr. Washington has demonstrated a particular thirst for knowledge on 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.

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.

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

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

##### Solution Summary

The solution explains the calculation of rate of return for various investment opportunities

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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.

The rate of return is the amount of money earned on the investment that is made. The rate is calculated over a period of one year. In this case, the investment that is made is in the purchase of shares. 100 shares are purchased at \$25.00 each. The total investment is 100X25=\$2,500. At the end of the year, the shares are sold for \$27.50. The total cash realized is 100X27.50=\$2,750. From this \$50 is paid as commission. Net ...

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