1.) You have just bought (on margin) 100 shares of IBM Corp. common stock for $1
ID: 1186852 • Letter: 1
Question
1.) You have just bought (on margin) 100 shares of IBM Corp. common stock for $108 per share. One year from now you expect to sell the stock for $140. The interest charge will be 9%. What return do you expect to earn on your investment? (Show all work. Ignore commissions.)
2.) You have the chance to buy either one of two bonds. The first is a tax-free municipal with a coupon yield of 6.5%. The second is a corporate bond with a yield of 8.5%. Both bonds are rated AA. Your tax rate is 28%. Which would you choose and why? (Show all work.)
I'd greatly appreciate the feedback from you all on these questions. I love learning off of what you all have to say!!!! :D
Explanation / Answer
1) Answer is as follows:
Total Share Price of 100 Share @ $108 = 108 x 100 = 10800
Interest on holding the amount = 10800 x 9 = 972
100
Total Cost of the Shares for one year = 10800 + 972 = $11772
Selling price of the shares @ $140 = 140 x 100 = $14000
Total Return on the investment = 14000-11772 = $2228
Percentage Return = 2228 x 100 = 18.92 %
11772
2) Answer is as follows:
For Tax Free municipal Corp Bond with
Coupon Rate of 6.5 (if paid 100 per Share) = 6.5 x 100 = 6.5
100
For Corporate Bonds with Coupon Rate of 8.5 (if paid 100 per Share)
= 8.5 x 100 = 8.5
100
Income Tax = 8.5 x 28 = 2.38
100
Net Income on Corporate Bonds = 8.5-2.38 = 6.12
Conclusion : Therefore we may see that return on municipal Corp Bond is More Therefore We may Choose the Tax Free Municipal Corp Bond with Coupon Rate 6.5
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