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(solution) PLEASE HELP!!! I HAVE ONLY 1 HOUR!!! Carol and Al Richards, both


PLEASE HELP!!!
I HAVE ONLY 1 HOUR!!!

Carol and Al Richards, both 67 years old , have only one goal: retirement. Their financial adviser has concluded that the $1,400,000 they have in their single rollover traditional individual retirement account (IRA) that was a rollover from Carol's pension plan is adequate to assure their retirement if it is invested prudently. They will receive pretax $25,000 per year from Social Security and desire about another pretax $70,000 per year (in real dollars) from their investments. They both expect to live until they are 95 years old. At this point the primary concern is risk. The normal risks that are of concern are normal investment risk, inflation risk, and low-probability, high probability events that could substantially affect the success of their retirement portfolio.

1) You have decided that a "check-a-month" bond ladder is the best approach for the Richards. You have designed a bond ladder that will pay more in April (to cover taxes) and December (for the holidays). What is the average amount that the Richards will receive from their bond ladder each month? On average what is the total amount the Richards will receive each month. Does this meet their retirement goal?

Bonds Maturing In

Market Price

Face Value

Price*

Coupon Rate

Interest Paid In

Interest Paid Each Perod

1 year

$135,000

$150,000

4.50%

Jan/July

$3,375.00

2 years

$135,000

$150,000

4.75%

Feb/Aug

$3,564.00

3 years

$135,000

$150,000

5.00%

Mar/Sept

$3,750.00

4 years

$418,500

$450,000

5.25%

Apr/Oct

$11,812.50

5 years

$135,000

$150,000

5.375%

May/Nov

$4,032.00

6 years

$291,000

$300,000

5.50%

June/Dec

$8,250.00

*All bonds are bi-annual and in denominations of $50,000.

2) Why didn't you includ callable bonds in the bond ladder?

3) Evaluate the current yield and yield to maturity on the bonds listed in the bond ladder. (Show your mathematical calculations or how you used your financial calculator.)

 


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