Prof Hugo,

are you able to help with this short problem?

The Bond Investment Decisions of Dave and Marlene Carter Dave and Marlene Carter live in the Boston area, where Dave has a successful orthodontics practice. Dave and Marlene have built up a sizable investment portfolio and have always had a major portion of their investments in fixed-income securities. They adhere to a fairly aggressive investment posture and actively go after both attractive current income and substantial capital gains. Assume that it is now 2013 and Marlene is currently evaluating 2 investment decisions: one involves an addition to their portfolio, the other a revision to it. The Carters' first investment decision involves a short-term trading opportunity. In particular, Marlene has a chance to buy a 7.5%, 25-year bond that is currently priced at $852 to yield 9%; she feels that in 2 years the promised yield of the issue should drop to 8%. The second is a bond swap. The Carters hold some Beta Corporation 7%, 2026 bonds that are currently priced at $785. They want to improve both current income and yield to maturity and are considering 1 of 3 issues as a possible swap candidate: (a) Dental Floss, Inc., 7.5%, 2038, currently priced at $780; (b) Root Canal Products of America, 6.5%, 2026, selling at $885; and (c) Kansas City Dental Insurance, 8%, 2027, priced at $950. All of the swap candidates are of comparable quality and have comparable issue characteristics. Questions Regarding the short-term trading opportunity: What basic trading principle is involved in this situation? If Marlene's expectations are correct, what will the price of this bond be in 2 years? What is the expected return on this investment? Should this investment be made? Why? Regarding the bond swap opportunity: Compute the current yield and the promised yield (use semiannual compounding) for the bond the Carters currently hold and for each of the 3 swap candidates. Do any of the swap candidates provide better current income and/or current yield than the Beta Corporation bonds the Carters now hold? If so, which one(s)? Do you see any reason why Marlene should switch from her present bond holding into one of the other issues? If so, which swap candidate would be the best choice? Why? Reverend Mark Thomas Ponders Mutual Funds The Reverend Mark Thomas is the minister of a church in the San Diego area. He is married, has one young child, and earns a \"modest income.\" Because religious organizations are not notorious for their generous retirement programs, the reverend has decided he should do some investing on his own. He would like to set up a program that enables him to supplement the church's retirement program and at the same time provide some funds for his child's college education (which is still some 12 years away). He is not out to break any investment records but wants some backup to provide for the long-run needs of his family. Although he has a modest income, Mark Thomas believes that with careful planning, he can probably invest about $250 a quarter (and, with luck, increase this amount over time). He currently has about $15,000 in a savings account that he would be willing to use to begin this program. In view of his investment objectives, he is not interested in taking a lot of risk. Because his knowledge of investments extends to savings accounts, Series EE savings bonds, and a little bit about mutual funds, he approaches you for some investment advice. Questions a. In light of Mark's long-term investment goals, do you think mutual funds are an appropriate investment vehicle for him? b. Do you think he should use his $15,000 savings to start a mutual fund investment program? c. What type of mutual fund investment program would you set up for the reverend? Include in your answer some discussion of the types of funds you would consider, the investment objectives you would set, and any investment services (e.g., withdrawal plans) you would seek. Would taxes be an important consideration in your investment advice? Explain