PERSONAL FINANCE CASE STUDIES CASE STUDY 15 INVESTING IN BONDS The Marcottes have been investing in stocks for the last year or so, and feel that they are on a winning streak. Luz, has joined an investment club, and together with other ladies in the club is spending some time researching some upcoming companies. There are a couple of points worth noting regarding the Marcottes. First Mrs. Marcotte has been gainfully employed for the last six months, which means that the family has even more money to invest. This is good news, since this can bring them closer to their retirement and investment goals sooner. The second point being, that they are like many new investors losing sight of diversifying their investments. They have researched the history of the stock market, and are convinced that other investments will never give them the returns that stocks will All this changed last week, when the Marcottes had a rade awakening and found out that one of the companies that they had invested in lost a significant value, and the stock that had been trading from a high of $45 went down to $12. The USFDA had a major ruling against the company, which caused quite a stir in the financial world. This could not have happened at a worse time, because the Marcottes purchased 100 additional shares in the company for $4500 Their discount broker is encouraging them to diversify their portfolio by looking into purchasing some bonds. Given that there is a great variety in bonds as well, the Marcottes are feeling somewhat overwhelmed. Q1. The Marcottes feel that bonds are only good for giving a regular stream of income in the form of interest. Are there other ways the Marcottes can benefit from investing in bonds? Q2. The Marcottes have become a little more tolerant of risk since they started investing in stocks. They feel that bonds are less risky, but by the same token things do not change much in the bond world. Is that true? Q3. Walk the Marcottes through a typical bond transaction. Q4. Since both the Marcottes are working they are also in a higher tax bracket. Are there any tax implications when investing in stocks? Q5. If the Marcottes are currently in a 28% tax bracket, and they purchase a bond that has a tax-exempt yield of 6 percent, calculate its taxable equivalent yield. What would be the taxable equivalent yield of this bond if they were in the 34% tax bracket?