from the value of the corporate bond today and the price of college tuition today. What the client has not realized is that the value of the bond today may not be the same in seven years. Further, the cost of college tuition is likely to rise in the next seven years. Therefore, it is not feasible to make the assumption that the bond at maturity will be enough to cover his daughter’s full tuition.
With the above assertion stated, it must be noted that the economic department’s research shows that interest rates are going to decline to historical lows in the coming years. When the interest rates fall, the value of the bond increases. This can affect the client in a number of ways. The main effect of the lowered interest rates would indicate that the client could potentially sell each bond before maturity and generate a profit due to the increase in value. Because the MBS has a higher coupon rate, not only could he sell the bond at a higher rate, but the MBS would be more appealing to investors. All in all, the mortgage-backed security seems to be the better investment for the client. Itis collaterized, virtually eliminating risk. The coupon rate is not only higher, but will most likely pay more frequently, adding extra usable income to the client to invest or do as he sees fit. Finally, with the interest rates et to tumble, the client’s MBS will mature early, giving him accessto invest those funds in another asset. Memo #2 Previously, a memo was sent recommending the client choose to invest in a pass-through mortgage-backed security rather than a conventional corporate bond. Upon further evaluation and research, a new recommendation has been issued to instead invest in a AA-rated, Class A VADM tranche, for reasons that will be explained below.
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- Winter '16
- Johnny Martin
- Debt, corporate bond