Jim and Betty Williams have come to you, their financial planner, for help in developing a plan to accomplish their financial goals.Jim is 65 years old, and in good health.He owns Williams Pharmacy, a small pharmacy located in the town that they live in.The pharmacy has 10 employees, and he draws a salary of $250,000 per year from the company.His wife Betty, 52 years old, is a manager at a medium sized CPA firm, also in town.Her salary is $80,000 per year.Besides their three children, Justin (23), Ryan (21), and Noelle (15), Betty has a daughter from a previous marriage named Michelle who is 30 years old, and lives on her own.

After much discussion between you and the family, you agree to manage the $2M retirement portfolio for the couple.You decide that they should employ the $2M in cash into a moderate portfolio consisting of equities, fixed income, cash, and alternative investments.

As their financial planner, one of the first things you do is construct an individual bond ladder, more heavily weighted with shorter and medium-term bonds, mostly consisting of high-grade corporate issues.The first bond you purchase is selling today for $1,103.19.It pays $50 every six months.It matures in 30 years.The second bond is purchased for $1,147.20.It was originally issued at par and will mature 10 years from today, the day you purchase it.The bond agreement states that the bond may be called five years from today at $1,050.The current risk-free rate is 7% and the market risk premium is 8%.

You also start to add long individual stock positions to the portfolio. One of the stocks you choose, Boogle, Inc., has a beta of 1.5, current price of $20, and an annual dividend yield of 4%. The forecasted one-year value is $22. On some of the individual stock positions, you plan on utilizing option strategies to either add income to the portfolio or to protect the positions from losses.

Finally, you decide to add a REIT fund to the couple's retirement portfolio that you have researched thoroughly, and deem of sufficient quality for inclusion.

read the case first:

"Regarding the first bond that you purchase, what would happen to the bond if annual interest rates suddenly rose by 2%?"