Charlie Chmartsky and his long-time childhood friend and now apartment mate,- Ted Timid, were discussing investing in bonds. Charlie is of the opinion that junk bonds should be a good investment because historically, the bond yield is much higher. He is recommending to his parents that they become more aggressive in their investment strategies and buy junk bonds so they can enjoy the higher interest yields. He also tells them that junk bonds would have to pay interest while stock dividends are only paid if the Board of Directors votes on them. Finally, he explains that they would be sitting in a great position if the company went bankrupt because they would come before stockholders in any bankruptcy-ordered distribution of assets.
Ted doesn't agree, and says that he thinks the better way to invest is to consider only bonds offered by AAA rated companies. While he understands the interest rate may be lower, there is a greater likelihood that the company will continue to be in business and be able to pay the bond interest. Charlie wants to get rich quickly while he is still young, so he can buy an expensive sports car to dazzle CMU coeds.
They have heard that you are finishing up a course in Financial Analysis, Planning and Control and ask you to settle their disagreement. Using good, sound theory from the text and lectures, give Charlie and Ted a conclusive answer to settle their disagreement. Use theory from the text and lecture to support your answer.
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