Compare the risk of the cd with the risk of the bond

Assignment Help Financial Management

Reference no: EM131085569

Grandpa Russ thinks he needs a fixed income for the next 10 years. He currently has $10,000 in CDs, which are maturing at the end of this month. The CDs can be renewed for one year at 4.5 percent. Russ calls his broker, Ben Seller, and learns that this $10,000 can be put to better use by purchasing debentures issued by Grab-n-Run, Inc. These bonds are 10-year bonds with a coupon rate of 8 percent, which is paid semiannually. The current market interest rate is 6 percent for bonds of similar nature. The broker tells Grandpa Russ that he may buy each bond for $1,400. Grandpa knows that he must pay a premium, but he believes that a $400 premium is too high.

A. What is the maximum price you should tell Grandpa to pay for each bond?

B. Compare the risk of the CD with the risk of the bond.

C. What else would you advise Grandpa with regard to this type of investment?

Reference no: EM131085569

Questions Cloud

Degree of operating leverage at given level of output : Consider a four-year project with the following information: initial fixed asset investment = $500,000; straight-line depreciation to zero over the four-year life; zero salvage value; price = $35; variable costs = $26; fixed costs = $200,000; quantit..

Effective cost of borrowing in case : Your firm has an average collection period of 28 days. Current practice is to factor all receivables immediately at a discount of 1.8 percent. What is the effective cost of borrowing in this case?

Company repayment be if you issue the coupon bonds : Suppose your company needs to raise $35 million and you want to issue 20-year bonds for this purpose. Assume the required return on your bond issue will be 8 percent, and you’re evaluating two issue alternatives: How many of the coupon bonds would yo..

Compare the risk of the cd with the risk of the bond : Grandpa Russ thinks he needs a fixed income for the next 10 years. He currently has $10,000 in CDs, which are maturing at the end of this month. The CDs can be renewed for one year at 4.5 percent. What is the maximum price you should tell Grandpa to ..

Mutual fund without adding any additional funds : N.Ebriate,a college student at a party university, decides to forego beer drinking and invest the $100 he saves at the end of each month in a mutual fund that is currently earning 18 percent annually. He has a job where he earns income and invests th..

What is the firm market value capital structure : Titan Mining Corporation has 4.3 million shares of common stock outstanding and 85,000 6.8% semi annual bonds outstanding, par value of $ 1,000 each. What is the firm’s market value capital structure? If Titan Mining is evaluating a new investment pr..

Concerns effect of taxes on various break-even measures : This problem concerns the effect of taxes on the various break-even measures. Consider a project to supply Detroit with 25,000 tons of machine screws annually for automobile production. Calculate the accounting, cash, and financial break-even quantit..

Example of the use of sinking fund : Which of the following is not an example of the use of a sinking fund?

User Account

All Pages