Troy is 45 and owns his own business. Selma is a nurse. They have two children.

Inflation is expected to increase by 4% annually, and both expect their salaries to increase at the same rate (4%). They generally believe that the S&P 500 is a good measure of the markets overall performance, and it has a historical rate of return of 12%, which they expect to continue. The Maclures have a required rate of return of 9%. Part of their portfolio holdings consists of short-term treasury bills and the rate you will calculate for those treasury bills should be applied as the risk free rate for any questions that require risk free rate information.

They consider themselves to be moderate to moderate-aggressive investors. They are in the 28% marginal income tax bracket for federal income tax purposes. As residents of Tennessee they pay no state income tax.

Total Annual Cash Inflow: $99,608

Total Expenses and Planned Savings: $98,362

Balance Available for Discretionary Investment: $1,246

Assets		Liabilities
Checking	8,000	Autos	19,000
Saving	25,475	Credit Card	3,500
Brokerage Account	58,121	Home Mortgage	139,150
Bond Portfolio	100,000	Condo Mortgage	107,627
Personal Residence	180,000
Ski Condo	120,000
Personal Property	100,000
Autos	87,000

Details of the Bond Portfolio:

	Par Value	Maturity	Coupon	Cost Basis	FMV
10,000 US T-bills	10,000	1	0	9,640.00	9,643.20
20,000 US T-bonds	20,000	30	8%	20,000	22,494.47
10,000 US T-bonds	10,000	20	0	1,313	2,625.30
20,000 Super co. bonds	20,000	20	9%	20,000	24,271.01
15,000 Meager Bonds	15,000	25	9%	15,000	3000.47
25,000 TN Municipal	25,000	15	6%	25,000	27,616.29
Money Market Acct					10,349.26
TOTAL					100,000.00

Note: The Super co bonds are investment grade quality while the Meager Bonds are junk bonds

Details of the Brokerage Account

Stock	Shares	Beta	Std. Dev	Div Yield	Avg. Return	Cost	FMV
Mega co	1000	.88	12.5%	4.0%	12.5%	8,046.47	14,500
Tiny co	1000	1.24	18%	0	15%	10,724.35	12,333
Oil co	1000	1.00	10%	3.5%	8%	11,135.70	15,150
Auto co	1000	1.12	10%	3.0%	10%	12,124.72	16,138
TOTAL							58,121

Note: The stock portfolio has a correlation coefficient with the market of .80

1. Which bonds in the bond portfolio are subject to Default Risk?

2. Which bonds in the bond portfolio are subject to Reinvestment Rate Risk?

3. Which bonds in the bond portfolio are subject to Interest Rate Risk?