University of South Florida Mr and Mrs Kent Investment Analysis Excel Sheet

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Nc2410

Mathematics

University of South Florida

Description

Mr. and Mrs. Kentcontacted us (the financial advice firm you work for) because they need some help with investing in fixed income. They own their own house; they already have equity investments, and they are considering investing$300,000 in fixed income. They tell us that they are interested in an investing horizon of about 20 years. We must respondto thesequestions:

1.A) What are the fixed income investments we should consider? (Hint: Simply write their names in a list.)B) What do you recommend for us among CDs, treasuries, and corporate bonds? (Hint: discuss yields foreachwith, for example, the information available at vanguard.com.)

2.A) Find a suitablecorporate bond at vanguard.comhighest possible grade, not callable, not convertible, about 20 years maturity.B) Prepare a table of cash flows for the bond you have selected, and the Kent’s $300,000 investing budget. (Note: picture-example given in the cash-flows tab in the file “teaching-f20-fixed-income-annotated-2.xlsx”.In order to best learn, you must do this by yourself.)

3.A) Are annual cash-flows over $15,000for the bond investment you have selected? (Hint: simply answer Yes, or No.)B) What could we do if the cash flows were less than $15,000 per year?(Hint: remember the classroom discussion about possible bond portfolio management strategies for the Kents.)

4.How does acorporate bond investment compare with investing in bond mutual funds? (Find a corporate bond mutual funds at vanguard.com, or at any other site you may find).

5.What about immediate annuities? Should we use the single corporate bond or the insurance annuities? We are both 65 years old. (Hint: go to immediateannuities.com, input our data, copy & paste the data in your report, and briefly explain the relevant numbers.)

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Explanation & Answer

Attached.

INVESTMENT ANALYSIS FOR MR. AND MRS KENT
Introduction
Fixed income investment is very good. Under this type of investment, the borrower or the one issuing
is obliged to make the payments of a fixed amount at a fixed schedule. With $300,000, the two can do a
List of fixed investment list to consider
Vanguard Short-Term Corporate Bond ETF (VCSH)
DFA Short-Term Extended Quality Portfolio (DFEQX)
DFA Five-Year Global Fixed Income Portfolio (DFGBX)
Fidelity U.S. Bond Index Fund (FXNAX)
Vanguard Total Bond Market Index Fund (VBTLX)

Between treasuries, CDs and corporate bonds, I would advocate for corpotate bonds be
Corporate bonds have the following advantages:
They have higher growth potential than government bonds
They are less vulnerable to inflation and interest rate increases than government bonds due to generally
They are a very useful diversifier for low-medium, medium and medium-high risk portfolios
They are less risky than equities or property

the cash flows for the bond that I have selected is more than $15, 000. The following strategies ae there
Indexing Bond Strategy
Indexing is considered to be quasi-passive by design. The main objective of indexing a bond portfolio is t

Due to the size of this index, the strategy would work well with a large portfolio due to the number of bo

Immunization Bond Strategy
This strategy has the characteristics of both active and passive strategies. By definition, pure immunizati

Similar to indexing, the opportunity cost of using the immunization strategy is potentially giving up the u

In fact, the purest form of immunization would be to invest in a zero-coupon bond and match the matur

Duration, or the average life of a bond, is commonly used in immunization. It is a much more accurate p

For example, just like a pension fund would use an immunization to plan for cash flows upon an individu

Active Bond Strategy
The goal of active management is maximizing total return. Along with the enhanced opportunity for retu
The Bottom Line
There are many strategies for investing in bonds that investors can employ. The buy-and-hold approach
Bond valuation
face value

$300.000

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