What is the suitable investment option, stock or bond?
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An investment fund is considering two long term investments. Which is the best investment assuming equal risks and a 10 year investment?
Bond : Coupon bond with a face value of $100,000 that can be purchased today for $70,000 that matures in 10 years. Its annual coupon rate is 8% paid quarterly.
Stock: A stock whose shares can be purchased for $84 per share today and its price is forecast to grow 12% annually for the next 10 years. It will pay dividends of $7.50 quarterly.
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Solution Summary
This solution provides step-by-step calculations for evaluating the better investment option in an attached Excel file.
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Please refer attached file for better clarity of tables and formulas.
Bond :
Price of bonds=$70,000
Face Value of bonds=$100,000
Coupon amount per quarter=100000*8%/4=$2,000 per quarter
Number of periods=10*4=40 quarters
Let us see the cash flows associated with the investment.
Period Cash flow
0 -70000
1 2000
2 2000
3 2000
4 2000
5 2000
6 2000
7 2000
8 2000
9 2000
10 2000
11 2000
12 2000
13 2000
14 2000
15 2000
16 2000
17 ...
Education
- BEng (Hons) , Birla Institute of Technology and Science, India
- MSc (Hons) , Birla Institute of Technology and Science, India
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