information for Sampsons Case 16 Excel
The Sampsons are considering investing in bonds as a way of saving for their children’s college education. They learn that there are bonds with maturities between twelve and sixteen years, which is exactly when they need the funds for college expenses. Dave and Sharon notice that some highly rated municipal bonds offer a coupon rate of 2%, while some highly rated corporate bonds offer a coupon rate of 4%. The Sampsons could purchase either type of bond at its par value. The income on the municipal bonds would not be subject to federal income tax. Dave and Sharon are looking to you for advice on whether bonds are a sound investment and, if so, what type of bond they should purchase.
1)Should the Sampsons consider investing a portion of their savings in bonds to save for their children’s education? Why or why not?
2)If the Sampsons decide to purchase bonds, what maturities should they consider, keeping in mind their investment goal?
3)If the Sampsons decide to purchase bonds, should they invest in corporate bonds or municipal bonds? Factor into your analysis the return they would receive
4)The Sampsons learn that many corporate bonds have recently been downgraded due to questionable financial statements. However, the Sampsons are not concerned because the corporate bond they are considering is highly rated. Explain the possible impact of a downgrade of the corporate bond to the Sampsons, given their financial goals.
