Question

Your current CD matures in a few days. You would like to find an investment with a higher rate of return than the CD. Stocks historically have a rate of return between 10% and 12%, but you do not like the risk involved. You have been looking at bond listings in the newspaper. A friend wants you to look at the following corporate bonds as a possible investment. A 5-column table with 2 rows. Column 1 is labeled Bond with entries A B C 7 and one-half 15, X Y Z 7 and three-fourths 15. Column 2 is labeled current yield with entries 7.5, 8.4. Column 3 is labeled volume with entries 128, 17. Column 4 is labeled Close with entries 104 and three-fourths, 100 and one-half. Column 5 is labeled Net change with entries blank, + one-fourth. What is the annual interest you would earn on each bond? a. ABC 128; XYZ 17 b. ABC 7.5; XYZ 8.4 c. ABC 104Three-fourths; XYZ 100One-half d. ABC 7One-half; XYZ 7Three-fourths

Answer 1

The annual interest you would earn on each bond depends on the bond's coupon rate, which can be calculated by dividing the bond's current yield (Column 2) by 100. For Bond A and C, the coupon rate would be 7.5%, and for Bond X and Y, it would be 8.4%. The annual interest you would earn on each bond would be the coupon rate multiplied by the bond's face value (Column 1). For Bond A and C, the annual interest would be 7.5% * $15 = $1.125, and for Bond X and Y, it would be 8.4% * $15 = $1.26.

Answer 2

Corporate bonds offer higher returns than CDs. The annual interest on each bond can be calculated by multiplying the current yield by the face value of the bond. The correct answer is option b. ABC 7.5; XYZ 8.4.

Step-by-step explanation:

Corporate bonds are a type of investment that can provide a higher rate of return compared to a CD. In this case, you are considering three corporate bonds labeled A, B, and C, with different current yields, volumes, close prices, and net changes.

To calculate the annual interest you would earn on each bond, you need to multiply the current yield by the face value of the bond.

For example, for bond A with a current yield of 7 and a half percent (7.5%), the annual interest would be $750 (7.5% of $10,000). Similarly, for bond XYZ with a current yield of 8.4%, the annual interest would be $840 (8.4% of $10,000).

Therefore, the correct answer would be option b. ABC 7.5; XYZ 8.4.