Answer To: PART 3 OF PDF ONLY I. School Versus Work A. The school you would like to attend costs $100,000. To...
Akash answered on Oct 22 2021
Running Head: FIN 320 FINAL PROJECT PART III 1
FIN 320 FINAL PROJECT PART III 8
FIN 320 FINAL PROJECT PART III
Table of Contents
I 3
a) 3
b) 4
c) 5
d) 6
II 7
a) 7
b) 7
c) 8
III 8
a) 8
b) 8
References 10
I
a)
No of bonds
100
Face Value of each bond
1000
Coupon rate
3.25%
Time (years)
5
Present Value of bonds
117341.1
Present Value of bonds
No of Stocks of Apple
500
Stock price 5 years ago
105
Current stock price
242
Return on Investment
18.19%
Total value of current stock
121000
Present Value of stocks
In the given scenario, it is mentioned that the school expenses would be $100000. There are two options, which include selling bonds to arrange $100000 or selling stocks of Apple for the same purpose. From the above table, it can be observed that the return from the bond is lower than the return from the stock of Apple. The compounded annual growth rate from bonds is 3.25%, which is fixed throughout the tenure of the bond, which is 10 years.
On the other hand, in spite of difficulties in the price of the Apple stock, the compounded annual growth rate seems to be greater than 18%, which is almost 5-6 times of the return from the Apple bonds. The main factor behind deciding the source of funds is the return and risk involved in the investment.
From the above data, it can be observed that the return from Apple stock is much higher than the return from the bonds of Apple. However, the risk in stock is higher than the risk in bonds. According to Almazan, Chez and Titman (2017), bonds are safe as thy offer a fixed return throughout the period, irrespective of the performance of the economy. On the other hand, stocks are affected by multiple factors such as performance of economy, operational efficiency of the company, quality of management, business model, competition and others.
However, Apple is one of the best companies in the technology industry may it be in terms of performance, management or business model. The stock of Apple seems to offer a steady return to the investors rather than major fluctuations. In addition to that, the dividends are also being offered by the company at regular intervals, which is an added advantage in holding the stocks of Apple.
b)
It is always preferable to have a diversified portfolio rather than investing in a particular type of securities. As noted by Malenko (2018), equities have provided the maximum returns in the past but the risk involved is very high. On the other hand, bonds tend to offer a fixed return on the investment, but the return is very low in comparison to the equity market. Therefore, it is always preferred to have a diversified portfolio of investments. The legendary investor Warren Buffet quoted that “Never put all eggs in a single basket”. The reason behind the quote was it becomes highly risky if all the funds are put into a single type of investment.
There are both advantages and disadvantages of selling a combination of stocks and bonds. In-depth analysis of the economy and security market is of utmost importance for deciding the ratio in which the stocks and bonds are to be sold. As commented by Tsagkari, Couturier, Kokossis and Dubois (2016), selling a mix of bonds and shares helps an investor to have ample liquidity along with hedging the risk of existing investment. If a combination of stock and bond is sold, it indicates that the remaining investment have a mix of stock as well as bonds.
This ensures fixed return from bonds along with chances of higher returns from equities. In addition to that, the risk is also shared effectively due to presence of stock and bond in the remaining portfolio. In case an investor wishes to sell only bonds, then the risk from the existing equities tends to be very higher. On the other hand, if the investor wishes to sell only stock and keep the bonds,...