Question: Earl graduates from college, returns from Jamaica, and goes to work for his uncle at the local car dealership. Earl is a very business oriented and out-going person and quickly begins making bookoos of money selling cars and trucks. He knows he should be investing a portion of his income, so he decides to set up an appointment with a financial planner and get a mutual fund going. Earl likes finance and wants to take an active part in his investment, so he tells his planner that he wants to pick the companies that are to be included in his investment portfolio. With guidance from his financial planner, Earl begins the task of setting up his portfolio. He realizes that he needs to stay diversified and not put all of his eggs in one basket, so he decides that in addition to stocks; he wants to also include a few bonds in the portfolio.
Earl finds two different bonds that he decides to include in his portfolio:
Bond 1 is priced at $928, has a coupon rate of 11%, interest paid annually and 9 years to maturity. What is the yield to maturity of this bond?
Bond 2 has 10 years to maturity and pays quarterly interest at an annual coupon rate of 9.5%. The market rate of this bond is currently 12%. How much will Earl have to pay to purchase this bond?
In addition to the two bonds, Earl wants to invest in stock from 2 different companies. He also knows that he should select his stock from two different industries in an attempt to have the lowest possible correlation; so Earl decides to buy some stock from the auto company in which he works, and the other from a company that would not be correlated with the auto industry. Since automobile sales move up and down with the economy, maybe Earl should consider investing in a company that will generate more sales when the economy is in a recession period. This would need to be something that people buy no matter what the economy was doing, like toilet paper, or maybe a discount retailer that people would turn to when their money is tight. Earl decides to invest in Ford Motor Company and Family Dollar Stores, Inc.
The Ford Motor Company stock is currently selling for $13.41 and will be paying dividends of $.60 per share. The dividend 4 years ago was $.20. What is the yield of the Ford stock?
Family Dollar stock is currently selling for $79.42 and paid $1.14 per share dividends this past year. Dividends three years ago were $.69. What is the current yield for this stock?