Question

Last year, Norvin purchased 42 shares of Stock A at $50 per share, 124 shares of Stock B at $25 per share, and a four-year $3500 bond with an 8.54% coupon for $5950. Norvin sold both stocks today. Stock A is worth $58 per share and Stock B has a value of $29 per share. Assuming neither stock paid a dividend, which investment has the highest rate of return? (4 points)

Stock A

Stock B

Bond

Stock A and Stock B

And please explain why!

Answer 1

Stock A and Stock B

Explanation:

After 1 year, the value of Stock A is 58/50 = 1.16 times what it was, an increase of 16%.

After 1 year, the value of Stock B is 29/25 = 1.16 times what it was, an increase of 16%.

The bond has coupon value of $298.90 each year, about 5.02% of the amount invested. (However, the value of the bond at the end of 4 years is only $3500, so represents a net loss of about $1254.40 over that time period. We're not quite sure why Norvin purchased this bond at that price.)

Stock A and Stock B have the highest rate of return.