Question

Mark has invested in Evu Confectioners. He owns 220 shares of stock in Evu Confectioners, with each share costing him $14.79 apiece but paying a yearly dividend of $2.03. Mark also owns three par value $500 bonds from Evu Confectioners, each of which had a market value of 93.630 and which pay 8.8% interest. If Mark’s broker charges a commission of $55 per ten shares of stock bought or sold and a commission of 3% of the market value of each bond bought or sold, which aspect of Mark’s investment in Evu Confectioners has the greater percent yield, and how much greater is it?
a.
The stocks have a yield 4.33 percentage points greater than that of the bonds.
b.
The stocks have a yield 0.88 percentage points greater than that of the bonds.
c.
The bonds have a yield 0.32 percentage points greater than that of the stocks.
d.
The bonds have a yield 3.68 percentage points greater than that of the stocks.

Answer 1

Treat the bond quote 93.630 as percent of par (market price = 93.63% of $500).

Stocks
- Price paid = 220 × $14.79 = $3,253.80
- Broker commission = $55 per 10 shares = $5.50/share → 220 × $5.50 = $1,210.00
- Total stock cost = $3,253.80 + $1,210.00 = $4,463.80
- Annual dividends = 220 × $2.03 = $446.60
- Stock yield = 446.60 / 4,463.80 ≈ 0.10005 = 10.005% ≈ 10.00%

Bonds
- Market price per bond = 93.63% of $500 = $468.15
- Interest per bond = 8.8% of $500 = $44.00 → 3 bonds = $132.00
- Commission = 3% of market value per bond = 0.03 × $468.15 = $14.0445 per bond → total commission ≈ $42.13
- Total bond cost = 3 × $468.15 + $42.13 = $1,446.58
- Bond yield = 132.00 / 1,446.58 ≈ 0.09127 = 9.127% ≈ 9.13%

Difference = 10.005% − 9.127% ≈ 0.878% ≈ 0.88 percentage points.

Answer: b. The stocks have a yield 0.88 percentage points greater than that of the bonds.