Question

Five years ago, Benjamin invested in Parchar Special Effects. He purchased four par value $1,000 bonds from Parchar Special Effects at a market rate of 96.230. Each bond had an interest rate of 7.2%. Benjamin also purchased 200 shares of stock in the same company, each of which cost $19.08 and had a yearly dividend of $2.04. Today, bonds from Parchar Special Effects have a market rate of 104.595, and stock in Parchar Special Effects costs $22.62. If Benjamin liquidates his portfolio and sells all of his investments, which aspect of his investment will have yielded him a greater total profit, and how much greater is it?
a.
The bonds yielded $940.20 more in profits than the stocks.
b.
The bonds yielded $33.00 more in profits than the stocks.
c.
The stocks yielded $373.20 more in profits than the bonds.
d.
The stocks yielded $973.40 more in profits than the bonds.

Answer 1

Compute total profit from each.

Bonds:
- Purchase price per bond = 96.230% of $1,000 = $962.30. For 4 bonds cost = 4 × 962.30 = $3,849.20.
- Coupons: 7.2% of $1,000 = $72/year → 5 years = $360 per bond → 4 bonds = 4 × 360 = $1,440.
- Sale price per bond = 104.595% of $1,000 = $1,045.95. For 4 bonds sale proceeds = 4 × 1,045.95 = $4,183.80.
- Total receipts = coupons + sale = 1,440 + 4,183.80 = $5,623.80.
- Bond profit = total receipts − cost = 5,623.80 − 3,849.20 = $1,774.60.

Stocks:
- Purchase cost = 200 × $19.08 = $3,816.00.
- Dividends = 200 × $2.04 × 5 = $2,040.00.
- Sale proceeds = 200 × $22.62 = $4,524.00.
- Stock profit = (dividends + sale) − cost = (2,040 + 4,524) − 3,816 = $2,748.00.

Difference: 2,748.00 − 1,774.60 = $973.40.

Answer: d. The stocks yielded $973.40 more in profits than the bonds.