Corporate Bonds

Archive for September, 2006

Question: bernie and pam are a young married couple.They will each make about $50,000 in the next year and will have?

$40,000 to invest.They now rent an apartment but are considering purchasing a condominium for $100,000. If they do, a downpayment of $10,000 will be required.Lew Mccarthy, an investment advisor and friend recommended the following investments:The condominium - expected annual increase in market value = 5%.
Municipal bonds - expected annual yield = 5%.
High-yield corporate stocks - expected dividend yield = 8%.
Savings account in a commercial bank-expected annual yield = 3%.
High-growth common stocks - expected annual increase in market value = 10%; expected dividend yield = 0. Calculate the after-tax yields on the foregoing investments, assuming the Brittens have a 28% marginal tax rate (based on Public Law 108-27, The Jobs and Growth Tax Relief Reconciliation Act of 2003).
How would you recommend the Brittens invest their $40,000? Explain your answer

Answer: I would recommend buying the condo. That is an easy decision based on their income.

I would put 10K in a savings account for an emergency fund. I would open ROTH IRAs(if they qualify) for both with high yield corporate stocks, so that would be 8K total.

The remaining 12K I would put in the high-growth common stocks.

The condo will increase 5K tax free. The savings account with gain 300 of ordinary income. The 640 from the ROTH IRAs is tax sheltered. The stocks will yield 1200 in capital gains.

Income = 5000+ 300 + 640 + 1200 = 7140

Taxes = 300*0.28 + 1200 * 0.10 = 204

Income = 6900

6900/40000 = 17.25% after tax return.

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