Y(i)             (ii)           Required:

ou are a portfolio manager for Mike and Belinda;

Andrew, age 64, is retiring and has £100,000 to invest. He is interested in purchasing fixed-income securities to provide for him income needs during retirement. Andrew will not have any other substantial income, and he will be in the 15% marginal income tax bracket. He has invested in bonds in the past, and he plans to be actively involved in this investment.

Mariam, age 45, has £40,000 to invest in a fixed-income security. She has invested in various types of bonds for 5 years, she considers herself an aggressive investor, and she is in the 28% marginal income tax bracket. Her primary goal is capital appreciation; income is a secondary consideration.

(a)  Discuss with reasons the kind of fixed-income security is appropriate for Andrew and Mariam. (Consider type, risk rating, marginal tax bracket, term, and other relevant factors.)                                                                                                (20 marks)

(b)  Answer the following questions about selecting bonds for Andrew and Mariam's portfolios:

(i)    What sort of characteristics would you look for in a bond chosen for a client with a high risk tolerance?                                                                                   (2 marks)

(ii)  What sort of characteristics would you look for in a bond chosen for a client with a moderate risk tolerance?                                                                           (2 marks)

(iii) What sort of characteristics would you look for in a bond chosen for a client with a low risk tolerance?                                                                                      (2 marks)

(iv) If you believe that interest rates will decline sharply in the future, what bond characteristics would you search for?                                                         (2 marks)

(v)  If you believe that interest rates will rise sharply in the future, what bond characteristics would you search for?                                                        (2 marks)