Question

Brenda has money invested in Esti Transport. She owns two par value $1,000 bonds issued by Esti Transport, which currently sells bonds at a market rate of 101.345. She also owns 116 shares of Esti Transport stock, currently selling for $15.22 per share. If, when Brenda made her initial investments, Esti Transport bonds had a market rate of 96.562 and Esti Transport stock had a share price of $13.40, which side of Brenda’s investment has gained a greater percent return, and how much greater is it? (HINT: difference/original)
a.
The bonds showed a return that was 4.78 percentage points higher than that of the stocks.
b.
The bonds showed a return that was 4.95 percentage points higher than that of the stocks.
c.
The stocks showed a return that was 8.63 percentage points higher than that of the bonds.
d.
The stocks showed a return that was 3.58 percentage points higher than that of the bonds.

Answer 1

Compute each percent return (change/original):

- Bonds: price moved from 96.562 to 101.345 (percent of par), so return = (101.345 − 96.562)/96.562 = 4.783/96.562 ≈ 0.04956 = 4.956% ≈ 4.96%.

- Stock: price moved from $13.40 to $15.22, so return = (15.22 − 13.40)/13.40 = 1.82/13.40 ≈ 0.13582 = 13.582% ≈ 13.58%.

Stocks outperformed bonds by 13.582% − 4.956% ≈ 8.626% ≈ 8.63 percentage points.

Answer: c.