Stephanie Carter has been gifted a sum of $50,000 by her grandparents on completing her graduation successfully. She is a fresh finance graduate and is excited to invest some money in the capital market, for which she intends to use the gifted sum of $50,000. However, instead of committing this money to the market immediately, she decides to wait for some time, work in the field and acquire some experience before proceeding with her intended investment. She thus contemplates an extremely conservative investment in a portfolio of stocks and bonds, at the start of year 5 from now. For now, she will leave the $50,000 in a fixed deposit with the bank which promises an interest rate of 6% per annum.

She will require a return of at least 9% on her stock investments and 4% on bond investments. Stephanie would have to pay 25% taxes on any interest income. Dividends will be tax-free. Stephanies research has allowed her to narrow down on the following investment candidates: Stocks:

Bonds:

1. Pleasant Innovations Ltd. had issued a series of 20-year bonds at 98% of face value (assume face value = $100). These bonds come with a coupon rate of 3% and will be paid semi-annually. By the start of year 5 from now, 5 years would have passed. Assume that the YTM remains constant over time.

2. D Right Side Inc. will offer a coupon of 4% per annum on its much awaited 20-year bonds. By the start of year 5 from now, these bonds would be 2 years old and would likely sell for a price of $70 per bond (face value = $100). Coupons would be paid annually. Assume that the YTM will remain constant over time.

3.Tried and tested Ltd. has bond issue with an after-tax YTM of 6%. 5 years from now, they have 25 years left to mature and offer a coupon rate of 8% paid annually. These bonds have a face value of $1,000 each.

Stephanie wants her portfolio to be distributed approximately 5-95 between stocks and bonds such that around 5% (3%) of her investable funds are allocated to stocks and 95% (3%) to bonds. Her investment criteria further specify that: For all stocks priced below $50, 100 shares each of such stocks are purchased and for stocks priced above $50, 50 shares each should be purchased. 100 units of each acceptable bonds be purchased.

1. Will Stephanie have enough funds for her investment in stocks and bonds, when needed? What will be the surplus / shortfall, if any?

2. Given that Stephanies bank offers an interest rate of 6% per year, what additional amount should she have deposited as a fixed deposit in the bank so as to accumulate the amount needed for her investment in stocks and bonds when needed?