Background information: I am a financial advisor for the following client. I nee
ID: 2794075 • Letter: B
Question
Background information:
I am a financial advisor for the following client. I need to create a portfolio for him and answer the following questions. Lifestyle costs 50% of gross income, married, 225,000$ gross income, 75 years old, net worth 150,000$, 4 children Our client is currently 75 years old, married, and has four children. He is earning a gross income of $225,000 a year. Out of that $225,000 his lifestyle consumes $112,500 throughout the year. In addition, his current net worth is $150,000. Also, because he has four children he has a need for long term savings. Questions: A) Select one corporate, municipal or treasury bond and describe why you selected it. Describe the business, YtM or YTC, Duration, What impact rising rates would have on the value of the bond. B) Identify how you could hedge your portfolio using options contracts. C) Identify how you will evaluate performance.
Explanation / Answer
Income - $225,000/Year
Monthly Expense - $112,500/Year
Net Worth - $150,000
Age - 75 Years
Children - 04
Before, we go for buying a bond, we need to develop an investment policy statement (IPS) and develop the following
The purpose of investment, maintain lifestyle of 50% of annual income, financial savings for 4 children and increase net worth. Being a senior citizen, 75 years of age, there will be investment constraints in terms of taking more risk.
We assume, the client will continue to earn $225,000 for rest of his life, therefore we can continue to investment in risk free or low risk securities that has high credit ratings both corporate and sovereign bonds. Therefore the available fund the client has right now is personal savings of $150,000 and also yearly savings of $112,500. The combine amount available for investment is 262,500.
Currently US 10YR Bond is selling at an around 2.4% yield. Therefore, high rates corporate bonds can be a good option which gives return from 6-7% and also investment in mutual fund could be safe investment for him. Since, his children need long term savings so, he can invest in mutual funds through systematic investment plan (SIP) and could earn interest rate more than 10%.
Therefore, for constructing his portfolio we could consider following products
That will give a good balance in his portfolio.
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