Suppose That You Are a Broker and People Tell You

question 81

Essay

Suppose that you are a broker and people tell you the following about themselves. What sort of bond would you recommend to each? Defend your choices.
a. "I am in a high federal income-tax bracket and I don't want to take very much risk."
b. "I want a high return and I am willing to take whatever risk necessary to get it."
c. "I want a decent return and I have enough deductions that I don't value tax breaks highly."

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Definitions:

Unamortized Premium

The portion of the premium paid over the par value of a bond that has not yet been expensed in the company's financial statements.

Carrying Amount

The book value of assets and liabilities on a company's balance sheet, calculated as the original cost minus any depreciation, amortization, or impairment costs.

Interest-Bearing Note

A debt instrument that specifies the amount borrowed, interest rate, and maturity date, obligating the borrower to pay interest.

Bond

A form of interest-bearing note used by corporations to borrow on a long-term basis.