Dave and Marlene Carter live in the Boston area, where Dave has a successful ort

Question

Dave and Marlene Carter live in the Boston area, where Dave has a successful orthodontics practice. Dave and Marlene have built up a sizable investment portfolio and have always had a major potion of their investments in fixed-income securities. They adhere to a fairly aggressive investment posture and actively go after both attractive current income and substantial capital gains. Assume that it is now 2010 and Marlene is currently evaluating two investment decisions; one involves an addition to their portfolio, the other a revision to it.

The Carters' first investment decision involved a short-term trading opportunity. In particular, Marlene has a chance to buy a 7.5%, 25 year bond that is currently priced at $852 to yield 9%; she feels that in two years the promised yield of the issue should drop to 8%.

The second is a bond swap. The Carters hold some Beta corporation 7%, 2023 bonds that are currently priced at $785. They want to improve both current income and yield-to-maturity, and are considering one of three issues as a possible swap candidate: (a) Dental Floss, Inc. 7.5%, 2035, currently priced at $780; (b) Root Canal Products of America, 6.5%, 2023, selling at $885; and (c) Kansas City Dental Insurance, 8%, 2024, prices at $950. All of the swap candidates are of comparable quality and have comparable issue characterisitcs.

a) Regarding the short-term trading opportunity:

1. What basic trading principal is involved in this situation?

2. If Marlene's expectations are correct, what will the price of this bond be in 2 year?

3. What is the expected return on this investment?

4. Should this investment be made? Why?

b) Regarding the bond swap opprtunity:

1. Compute the current yield and the promosed yield (use semiannual compounding) for the bond the Carters currenty hold and for each of the three swap candidates

2. Do any of the three swap candidates provdie better current income and/or current yield than the Beta corporation bonds the Carters now hold? If so, which one(s)?

3. Do you see any reason why marlene should switch from her present bond holding into one of the other three issues? If so, which swap candidate would be the best choice? Why?

Explanation / Answer

Kindly rate me please a) 1)Swing trading is a speculative activity in financial markets where stocks are bought and held for between one to four days. A swing trading position is typically held longer than a day, but shorter than trend following trades or buy and hold investment strategies that can be held for months or years. Profits can be sought by engaging in either Long or Short trading. 2)852(1+0.08)^2=993.77 3)852(1+0.09)^25=7346.86 4)investment can be made as the NPV of the investment is more than 7.5 %

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