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Bonds - Ranking Investment Opportunities

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1. Assume that you are in the 40% federal-plus-state marginal tax bracket and that capital gains taxes are deferred until maturity. Assuming equal investment risk and a horizontal yield curve, rank the following investment opportunities on the basis of the effective annual yields:

a. A $100 par value perpetual preferred stock with an annual coupon of 12%, quarterly payments, and selling at $105.
b. A $1,000 par value, 20-year, non callable, semiannual bond with a coupon of 12% currently selling at $1,050.
c. A $1,000 par value, 20-year, non callable, semiannual bond with a coupon of 6% selling at a price of $637.

d. How would the situation change if the ranker had been:

(1) a pension fund investment manager or
(2) a corporation that is in the 40% federal-plus-state bracket?

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1. Assume that you are in the 40% federal-plus-state marginal tax bracket and that capital gains taxes are deferred until maturity. Assuming equal investment risk and a horizontal yield curve, rank the following investment opportunities on the basis of the effective annual yields:

a. A $100 par value perpetual preferred stock with an annual coupon of 12%, quarterly payments, ...

Solution Summary

Ranking investment opportunities are examined. How situations change if the rankers has been is determined.

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See Also This Related BrainMass Solution

Foundation of Financial Management

You are given the following data on bonds from AT&T, Dell, and IBM. Each bond has a par value of $1000.

AT&T
Dell
IBM

Coupon
6.80
6.50
8.375%

Maturity
05/15/2036
04/15/2038
11/01/2019

Frequency
Semiannual
Semiannual
Semiannual

Rating
A
A-
A+

Calculate the value of the bond if your required return is 5 percent on AT&T, 6.5 percent on Dell, and 8 percent on IBM.
Determine the yield to maturity (YTM) on the bonds given the following prices.
AT&T
Dell
IBM

Price
$1,060.00
$1,016.57
$1,307.78

Based on each bond's ratings and your determination of its yield to maturity explain how you rank each bond for risk and return.
Assume you had $10,000 to invest. How many of each bond would you have? What dollar amount of interest would each bond return on the investment for the next year? What would your percentage return be for the year, that is, your interest payments divided by the total amount invested? You must submit your backup in Excel or other supporting documentation showing how answers were reached.

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