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 2 years ago
Next > < Previous

Related Solutions

Aligning Performance Appraisals and Compensation Plans During the past few weeks, we have learned that there...
Aligning Performance Appraisals and Compensation Plans During the past few weeks, we have learned that there are various methods of conducting employee performance appraisals (e.g., trait, behavioral, ranking, MBO, etc.). Your task for this assignment is to pick one of those methods, explain it, and discuss how it could be effectively used to impact employee compensation. Your response should consider the potential impact the performance evaluation method could have on at least three different organizational stakeholder groups. Also, your assignment...
Stock market is going crazy over the past several weeks and one of the discussions has...
Stock market is going crazy over the past several weeks and one of the discussions has been the bond market. Why do you think the bond market is freaking out Wall Street?
In the past few weeks we have learned that the number of miles driven has fallen...
In the past few weeks we have learned that the number of miles driven has fallen due to people staying at home during the coronavirus pandemic. Insurers are offering auto insurance rebates to policyholders due to the decrease in number of miles driven. New research however indicates that this does not tell the entire driving story. Although miles driven and traffic congestion are falling, both the accident rate and severity of accidents seems to be rising. Please explain what’s happening...
You have been working with the arrays for the past few weeks and you have learned...
You have been working with the arrays for the past few weeks and you have learned their limitations. In this assignment, you will be using a new data structure, HashMaps, to repeat Assignment 8.3. Main Method (5 points) Declare and initialize an HashMap with values of type of type Employee, and keys of type integer. In a while loop, keep initializing objects of type Employee, storing them in the HashMap, and allow the user to enter ID, salary, and leaveDays...
1 - Consider our readings over the past few weeks on U.S. isolationism and the lend-lease...
1 - Consider our readings over the past few weeks on U.S. isolationism and the lend-lease policy: why was it necessary for the United States to adopt the artifice of “lending” war supplies to Germany’s enemies? Why could they not just be “given” as aid? How does this reflect a different political environment than today, where the U.S. gives military aid to roughly 150 different countries annually?
Over the past few weeks, you have become more familiar with your staff and are beginning...
Over the past few weeks, you have become more familiar with your staff and are beginning to feel like part of their family. To that end, you have recently accepted some "friend requests" on Facebook from some of the staff. You were at home last night, getting caught up on Facebook when you came across a post from one of the employees that said: " I hate my new boss at the clinic. A power hungry jerk making too many...
The past few weeks have seen unprecedented action in terms of both fiscal policy initiatives and...
The past few weeks have seen unprecedented action in terms of both fiscal policy initiatives and monetary policy initiatives. In terms of size, timing, and coordination this is the fastest and strongest both entities have acted to 'alter' the economy. Please take some time to read 3 or 4 articles if you are not familiar with these actions. Briefly summarize 5 fiscal policy initiatives put in place recently, and what the Fed did in terms of Monetary Policy. This week...
Jenna is working on the audit of a client’s accounts receivable. During the last few weeks,...
Jenna is working on the audit of a client’s accounts receivable. During the last few weeks, she has conducted interviews with the accounts receivable manager, the chief financial officer, and staff working in the accounts receivable department. She has overseen the external confirmations of accounts receivable, 30% of which required the recipient to respond whether or not the amount stated was correct. Jenna also inspected subsequent cash receipts from the client’s customers. She vouched a sample of accounts receivable balances...
Jenna is working on the audit of a client’s accounts receivable. During the last few weeks,...
Jenna is working on the audit of a client’s accounts receivable. During the last few weeks, she has conducted interviews with the accounts receivable manager, the chief financial officer, and staff working in the accounts receivable department. She has overseen the external confirmations of accounts receivable, 30% of which required the recipient to respond whether or not the amount stated was correct. Jenna also inspected subsequent cash receipts from the client’s customers. She vouched a sample of accounts receivable balances...
Jenna is working on the audit of a client’s accounts receivable. During the last few weeks,...
Jenna is working on the audit of a client’s accounts receivable. During the last few weeks, she has conducted interviews with the accounts receivable manager, the CFO, and staff working in the accounts receivable department. She has also overseen the external confirmations of accounts receivable, 70 percent of which required the recipient to respond as to whether or not the amount stated was correct. Jenna also conducted a review of subsequent cash receipts from the client’s customers. She vouched a...
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT