Regarding the bond swap opportunity

Assignment Help Financial Management

Reference no: EM131817190

Dave and Marlene Carter live in the Boston area, where Dave has a successful orthodontics practice. Dave and Marlene have built up a sizable investment portfolio and have always had a major portion of their investments in fixed-income securities. They adhere to a fairly aggressive investment posture and actively go after both attractive current income and substantial capital gains. Assume that it is now 2016 and Marlene is currently evaluating two investment decisions: one involves an addition to their portfolio, the other a revision to it.

The Carters’ first investment decision involves a short-term trading opportunity. In particular, Marlene has a chance to buy a 7.5%, 25-year bond that is currently priced at $852 to yield 9%; she feels that in two years the promised yield of the issue should drop to 8%.

The second is a bond swap. The Carters hold some Beta Corporation 7%, 2029 bonds that are currently priced at $785. They want to improve both current income and yield to maturity and are considering one of three issues as a possible swap candidate: (a) Dental Floss, Inc., 7.5%, 2041, currently priced at $780; (b) Root Canal Products of America, 6.5%, 2029, selling at $885; and (c) Kansas City Dental Insurance, 8%, 2030, priced at $950. All of the swap candidates are of comparable quality and have comparable issue characteristics.

Questions

a. Regarding the short-term trading opportunity:

1. What basic trading principle is involved in this situation?

2. If Marlene’s expectations are correct, what will the price of this bond be in two years?

3. What is the expected return on this investment?

4. Should this investment be made? Why?

b. Regarding the bond swap opportunity:

1. Compute the current yield and the promised yield (use semiannual compounding) for the bond the Carters currently hold and for each of the three swap candidates.

2. Do any of the swap candidates provide better current income and/or current yield than the Beta Corporation bonds the Carters now hold? If so, which one(s)?

3. Do you see any reason why Marlene should switch from her present bond holding into one of the other issues? If so, which swap candidate would be the best choice? Why?

Reference no: EM131817190

Questions Cloud

Leader to understand qualitative and quantitative research : How important it is for a Manager/Leader to understand qualitative and quantitative research?

What is the internal growth rate-sustainable growth rate : What is the sustainable growth rate? What is the internal growth rate?

Using the gordon growth model : Using the Gordon Growth Model, determine the intrinsic value of Apple Inc.'s stock price and compare it to the actual price of the price today.

What is the average annual inflation over this bond life : what is the average annual inflation over this bond's life?

Regarding the bond swap opportunity : Regarding the short-term trading opportunity. Regarding the bond swap opportunity.

Using the idea of discounted future values : Using the idea of discounted future values, does buying the hybrid make sense? How long does one have to own the hybrid to reap the benefits?

What is the value of investment : What is the value of an investment that pays $56,000 every other year forever, What is the value today if the first payment occurs four years from today?

Calculate the risk-free rate of return : What do Fama and French use to calculate the risk-free rate of return?

What are some ways in which lender can protect themselves : Which case would you find more beneficial for the short and the long term as a shareholder? What are some ways in which the lender can protect themselves?

User Account

All Pages