Question

Eight years ago, Ian invested in Rayje Clothiers. He purchased five par value $1,000 bonds issued by Rayje Clothiers at a market value of 94.956, each of which yields interest of 7.5%. Ian also bought 250 shares of Rayje Clothiers stock at $17.22 apiece. Bonds from Rayje Clothiers yield interest of 7.5%, and stock from Rayje Clothiers yields dividends of $1.09 yearly. Today, Rayje Clothiers bonds have a market value of 108.224 and Rayje Clothiers stock sells for $19.96 per share. If Ian liquidates his portfolio and sells off all of his investments, which aspect of his investment in Rayje Clothiers will yield the greater total profit, and how much greater will it be?
a.
The bonds yielded $820.00 more in profits than the stocks.
b.
The bonds yielded $798.40 more in profits than the stocks.
c.
The stocks yielded $21.60 more in profits than the bonds.
d.
The stocks yielded $242.20 more in profits than the bonds.

Answer 1

Compute total profit for each:

Bonds:
- Purchase: 5 bonds × $1,000 × 94.956% = 5 × $949.56 = $4,747.80
- Interest: 5 × ($1,000 × 7.5%) = $375/year → 8 years = $3,000
- Sale: 5 × $1,000 × 108.224% = 5 × $1,082.24 = $5,411.20
- Total profit = interest + (sale − purchase) = $3,000 + ($5,411.20 − $4,747.80) = $3,663.40

Stocks:
- Purchase: 250 × $17.22 = $4,305.00
- Dividends: 250 × $1.09 = $272.50/year → 8 years = $2,180.00
- Sale: 250 × $19.96 = $4,990.00
- Total profit = dividends + (sale − purchase) = $2,180 + ($4,990 − $4,305) = $2,865.00

Difference: $3,663.40 − $2,865.00 = $798.40.

Answer: b. The bonds yielded $798.40 more in profits than the stocks.