Question: A LESSON FROM THE PAST

Back in 2002, Mary Goldberg, a 34-yearold widow, got a telephone call from a Wall Street account executive who said that one of his other clients had given him her name. Then he told her his brokerage firm was selling a new corporate bond issue in New World Explorations, a company heavily engaged in oil exploration in the western United States. The bonds in this issue paid investors 11.2 percent a year. He then said that the minimum investment was $10,000 and that if she wanted to take advantage of this "once in a lifetime" opportunity, she had to move fast. To Mary, it was an opportunity that was too good to pass up, and she bit hook, line, and sinker. She sent the executive a check-and never heard from him again. A few days later (and after her check was paid by her bank), she went to the library to research her bond investment. Unfortunately, she found there was no such company as New World Explorations, and she had lost $10,000. Right then and there, she vowed she would never invest in bonds again. From now on, she would put her money in the bank, where it was guaranteed. Over the years, she continued to save and deposit money in the bank and accumulated more than $32,000. Things seemed to be pretty much on track until one of her certificates of deposit (CD) matured.

When she went to renew the CD, the bank officer told her interest rates had fallen and current CD interest rates ranged between 0.50 and 1.5 percent. Faced with the prospects of lower interest rates, Mary decided to shop around for higher rates. She called several local banks and got pretty much the same answer. Then a friend suggested that she talk to Peter Manning, an account executive for Fidelity Investments. Manning told her there were conservative bonds that offered higher returns. But he warned her that these investments were not guaranteed. If she wanted higher returns, she would have to take some risks. While Mary wanted higher returns, she also remembered how she had lost $10,000. When she told Peter Manning about her bond investment in the fictitious New World Explorations, he pointed out that she had made some pretty serious mistakes. For starters, she bought the bonds over the phone from someone she didn't know, and she bought them without doing any research. He assured her that the bonds he would recommend would be issued by real companies, and she would be able to find information on each of his recommendations at the library or on the Internet. For starters, he suggested the following two investments:

1. America West Airlines corporate bonds that pay 8.057 percent annual interest and mature on July 2, 2020. This bond has a current price of $1,160 and is rated BBB.

2. Berkshire Hathaway corporate bonds that pay 3.40 percent annual interest and mature on January 31, 2022. This bond has a current price of $1,030 and is rated AA.

1. According to Mary Goldberg, the chance to invest in New World Explorations was "too good to pass up," and she lost $10,000. Why do you think so many people are taken in by get-richquick schemes?

2. Using the information obtained in the library or on the Internet, answer the following questions about Peter Manning's investment suggestions.

a. What does the rating for the America West Airlines bond mean?

b. What is the current yield for an America West Airlines bond?

c. What does the rating for the Berkshire Hathaway bond mean?

d. What is the current yield for a Berkshire Hathaway bond?

3. Based on your research, which investment would you recommend to Mary Goldberg? Why?