Question

In: Finance

With the stock market reflecting extreme volatility during the past few weeks, some individuals are becoming...

With the stock market reflecting extreme volatility during the past few weeks, some individuals are becoming concerned about their equity portfolio’s and are either considering selling their stocks or have already done so. Many investors are looking for stability and believe the bond market is a safe haven for their money.

Using the following information, please compute the investment performance and end of period asset value for the following “realistic” scenario.

A $100,000 investment in a 15 year, AA-rated corporate bond with a 5 percent coupon. Please calculate the annual interest income that you would receive each year, along with the value that you will receive when your bond matures.

The 15-year average return for the S&P 500 from January 1973 to December 2016 (29 separate 15 year periods) was as high as a 20% average annual return and as low as a 3.7% average annual return. Additionally, the average dividend yield for the S&P is 4.11% and the average annual dividend growth rate is 6.11%.

Using this information, please compare the investment in the 5% 15 year corporate bond with a $100,000 investment in a stock with a 3.7% dividend yield (10 percent less than the S&P 500 average yield) and a 3% dividend growth rate (50 percent of the S&P 500 dividend growth rate).

The annual investment returns are as follows: Year 1  (13.40%)        Year 2 (23.37%)       Year 3   26.38%    Year 4   8.99%     Year 5  3.00%              Year 6  13.62%           Year 7   3.53%      Year 8  (38.49%) Year 9  23.45%            Year 10  12.78%       Year 11  0.00          Year 12  13.41%   Year 13  29.60%          Year 14  11.39%       Year 15  (0.73%)

The bond interest payment of 5 percent is paid annually and not reinvested. To compare accurately with the bond investment, the stock dividend will not be reinvested, but paid annually as well.

Please calculate the value of the stock account at the end of each year and the dividend income from the stock on an annual basis.

Once you have performed the calculations, please let me know if you prefer to invest in a 5% corporate bond for 15 years or the stock and why.

Solutions

Expert Solution

Solution:

Based on the available data, the solution is as under:

Note: IRR is computed on the last column of the respective tables.

jeff jeffy answered 1 year ago
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