Explore BrainMass
Share

Explore BrainMass

    What is the suitable investment option, stock or bond?

    This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!

    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.

    © BrainMass Inc. brainmass.com October 10, 2019, 4:29 am ad1c9bdddf
    https://brainmass.com/economics/risk-analysis/what-is-the-suitable-investment-option-stock-or-bond-462793

    Solution Preview

    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 ...

    Solution Summary

    This solution provides step-by-step calculations for evaluating the better investment option in an attached Excel file.

    $2.19