Mini-Case #3

Capital Markets, Comparing Weighted Average Returns Versus Money Markets

CONCEPTS IN THIS CASE:

capital markets capital structure primary market secondary market initial public offering (IPO) NASDAQ

In Chapter 9 you invested your inheritance in the money market for one year; you are now prepared to make a commitment to longer-term instruments. To make the best-informed decision, you have started to study the capital markets alternatives in the United States.

You begin your analysis by defining the following terms (include risk and return factors where appropriate):

Capital markets

NYSE

AMEX

OTC

NASDAQ

Bonds

Stocks

Mortgages

Strips

Agency bonds

Municipal bonds

Corporate bonds

Call and sinking fund provisions

Junk bonds

Common stock

Preferred stock

Investment bankers and underwriting

General obligation municipal bonds

Revenue bonds

Your inheritance has grown to $1.2 million, and you are prepared to make long-term investment decisions. After considering the alternatives in the capital markets, you decide to divide the funds equally among the following financial instruments: U.S. Treasury notes (2-year maturity), U.S. Treasury bonds (20-year maturity), Ginnie Mae (10-year maturity), municipal bonds from your state (10-year maturity), corporate bonds from your company (nonconvertible 20-year maturity), junk bonds (10-year maturity), common stock, and preferred stock. You obtain one-year returns with beginning prices and rates from the first business day of the calendar year, and all ending prices and rates from the last business day of the calendar year, using library resources, the Internet, or other databases. (If you use the Internet, good sites for Treasury bills, notes and bonds are: www.fedstats.gov, www.federalreserve.gov, www.fiscal.treasury.gov/, andwww.ny.frb.org. Good web sites for information on stocks are: money.cnn.com, www.smartmoney.com, www.amex.com, and www.morningstar.com.)

What is the return on the U.S. Treasury notes?

What is the return on the U.S. Treasury bonds?

What is the return on the Ginnie Mae bonds?

What is the return on the municipal bonds?

What is the return on the corporate bonds?

What is the return on the junk bonds?

What is the return on the common stock?

What is the return on the preferred stock?

What is the weighted-average return for the capital market portfolio?

How does this weighted average return compare to the money market portfolio in Chapter 9?