I. School Versus Work A. The school you would like to attend costs $100,000. To
ID: 2757816 • Letter: I
Question
I. School Versus Work
A. The school you would like to attend costs $100,000. To help finance your education, you need to choose whether or not to sell your 1,000
shares of Apple stock, 1,000 EE Savings Bonds (with $100 denominations and 4.25% coupon rate) that are five years from their 30-year maturity date, or a combination of both. Provide the appropriate data and calculations that you would perform to make this decision.
B. What are the advantages and disadvantages of selling a combination of stocks and bonds? Be sure to support your answers.
C. Suppose that you choose to sell your stocks, bonds, or a combination of both. What is your choice, and what is your financial reasoning behind this choice? Consider supporting your answer with quantitative data.
D. Suppose that you choose to accept the job. What is your financial reasoning behind this choice? Be sure to support your answer with quantitative data.
Explanation / Answer
Answer A
In this case,the stocks will provide $100,000 whereas the bonds are 1000 dominated in $100,000 (1000 × 100) and matures in 5 years. The coupon will be 4.25, meaning that they pay 0.0425 × 100,000= 4,250 for each year but in year 5, you will receive 104,250 (100,000 + 4250 when the bond matures). Most bonds pay coupons and in the final year pays the principal.
Bond cashflow
Year 1 = $ 4,250
Year 2 = $4,250
Year 3 = $4,250
Year 4 = $4,250
Year 5 = $104,250 (100,000+4,250)
Total Cash = $121,250 (will be in 5 years )
To make it easier for most who are new to bonds, we shall assume that the bond is selling at par (meaning it will be sold for $100,000). Means you will forgo the coupons payments (4,250) for the next 5 years if you sell now. Therefore, you should sell the stocks only.
Answer B
Advantage of selling a combination of Stocks & bonds:
We can gain by maintaing a return on Bonds and taking a risk if the prices of stock increase.
Disadvantage of selling a combination of Stocks & Bonds :
By compromising the fixed retrun on Bonds.
Answer C.
I would opt to sell the stocks as the return on bonds are fixed as compare to the stocks.
Answer D
I am sold the socks because bonds provide higher return than the stocks i.e., the coupon rates on bonds.