Ebony Pall married at a very young age to Stock N. Bond, a man of age 20 years h

Question

Ebony Pall married at a very young age to Stock N. Bond, a man of age 20 years her senior. They lived lavishly for the next 10 years, when a sudden and unexpected shark attack ended Mr. Bond’s life. Fortunately, Stock expected he would not be around to take care of Ebony in her elder years, so he purchased $2 million in bonds and stocks to financially help her through her elder years. Ebony remarried shortly after Mr. Bond passed away. Her new husband, Shade E. Sneek, was most interested in Ebony's investment portfolio. He quickly noticed the following interesting bonds in her portfolio. Ebony held $500,000 in bonds with a 6% interest rate. Of these bonds, $250,000 of them had a call provision of March 31, 2011. Mr. Sneek told Ebony that the bonds no longer would pay interest since the call date had passed and that he would do her a favor and redeem them if she endorsed the bonds over to him. Ebony was feeling poorly that day and considered his offer to be a good faith offer. She quietly thanked her astrologer for sending Mr. Sneek to her. Recently, Ebony received a letter from Herefords Are Us, a cattle futures company in which she holds 10,000 shares of stock at $55 per share. The letter informed her that there will be a stock split on April 30, 2011 of 2 for 1. She is elated, since she and Mr. Sneek are planning an expensive 30 day ocean cruise to Iceland on August 15 and they need the money. Upon strong encouragement from Mr. Sneek, she plans on selling 200 shares of this stock to pay for the cruise, which costs $10,000. She will sell the shares on May 12, 2011. After Ebony endorsed the stock certificates over to her husband, he stated he would take care of the sales by calling his broker, Ima Krook, who will fix everything up neat and tidy. After Mr. Sneek leaves for the broker’s office, Ebony begins to wonder whether she did the right thing. She calls you, a soon to be graduate, to look things over for her.

Explanation / Answer

No, Ebony should not endorse bonds in favour of Mr Sneek since A bond call will almost always favour the issuer over the investor; if it doesn't, the issuer will simply continue to make the current interest payments and keep the debt active. Typically, call options on bonds will be exercised by the issuer when interest rates have fallen.

Secondly she should not sell shares since she is already earning interest on $500,000 bonds @ 6% which comes to $15,000 for half year

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