Your grandfather is retired and living on his Social Security benefits and the interest he gets from savings. However, the interest income he receives has dwindled to only 2 percent a year on his $200,000 in savings as interest rates in the economy have dropped. You have been thinking about recommending that he purchase some corporate bonds with at least part of his savings as a way of increasing his interest income.
Specifically, you have identified three corporate bond issues for your grandfather to consider. The first is an issue the Young Corporation that pays annual interest based on a 7.8 percent coupon rate and has 10 years before it matures. The second bond was issued by Thomas Resorts and it pays 7.5 percent annual interest and has 17 years until it matures. The final bond issue was sold by Entertainment, Inc., pays an annual coupon interest payment based on a rate of 7.975 percent, and has only 4 years until it matures. All three bond issues have a $1,000 par value. After looking at the bonds’ default risks and credit ratings, you have very different yields to maturity in mind for the three bond issues, as noted below.
Before recommending any of these bond issues to your grandfather you perform a number of analyses. Specifically, you want to address each of the following issues:
5. What are some of the things you can conclude from these computations?
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