Question

Josef owns four par value $1,000 bonds from Dowc Beverage Co. Each bond has a market value of 104.561 and gives 9.2% interest. Josef also owns 170 shares of stock in Dowc Beverage Co. Stock in Dowc Beverage Co. has a share price of 26.25 and pays a dividend of $2.38. If the broker Josef employed to purchase these stocks and bonds charges a commission of $72 for each ten shares of stock bought or sold and a commission of 4% of the market value of each bond bought or sold, which aspect of Josef’s investment in Dowc Beverage Co. has a greater percent yield, and how much greater is it?
a.
The stocks have a yield 2.15 percentage points higher than that of the bonds.
b.
The stocks have a yield 0.27 percentage points higher than that of the bonds.
c.
The bonds have a yield 1.35 percentage points higher than that of the stocks.
d.
The bonds have a yield 2.08 percentage points higher than that of the stocks.

Answer 1

Compute yields after commissions.

Bonds (per bond)
- Price = 1,000 × 1.04561 = $1,045.61
- Commission = 4% × 1,045.61 = $41.8244
- Total cost = $1,045.61 + $41.8244 = $1,087.4344
- Annual interest = 9.2% × $1,000 = $92
- Yield = 92 / 1,087.4344 ≈ 0.08460 = 8.46%

Stocks (170 shares)
- Market cost = 170 × $26.25 = $4,462.50
- Commission = ($72 per 10 shares) → 17 × $72 = $1,224
- Total cost = $4,462.50 + $1,224 = $5,686.50
- Annual dividend = 170 × $2.38 = $404.60
- Yield = 404.60 / 5,686.50 ≈ 0.07117 = 7.12%

Difference: 8.46% − 7.12% ≈ 1.35 percentage points.

Answer: c. The bonds have a yield 1.35 percentage points higher than the stocks.