1. List four advantages and four disadvantages of investing in bonds.
2. If Miguel thinks that interest rates are going to increase, what type and maturity of bond should he purchase? What type and maturity should he avoid? Why?
3. Develop a checklist of rules that Miguel should use when purchasing a bond.
4. To be as safe as possible, what bond maturity should Miguel choose to meet his home purchase goal? What type(s) of risk does this strategy reduce or avoid?
5. Explain to Miguel why he might want to consider investing in preferred stock rather than bonds.
6. What is the fair market value of the preferred stock that Miguel is considering purchasing if his required rate of return is 8 percent?
7. If Miguel really wants to purchase real estate to meet his objective, is a direct or an indirect real estate investment more appropriate for him? Explain your answer in terms of liquidity, diversification, and safety.
Miguel, a recent college graduate who heard that you know something about investing, wants to ask about investing in bonds. Miguel indicated that, according to his friends, the stock market was too volatile and bonds were a safer place to invest. Miguel admitted that he really didn't know much about either stocks or bonds but that he hoped to start saving so that he could purchase a house in the next 5 years. Miguel also mentioned that he had heard about preferred stock and real estate as alternatives to bonds. His roommate recommended that he buy a preferred stock that pays a $4.50 annual dividend or purchase farmland outside of his hometown. Answer the following questions in a way that will help Miguel learn investment concepts.