Back in 2018, Betty Wallace, a 47-year-old single mother, got a telephone call from a Wall Street account executive who said that other clients had given him her name. Then he told her his brokerage firm was selling a new corporate bond issue in Great Resources Exploration, a company heavily engaged in oil exploration in the southern United States and off the Texas and Louisiana coast. The bonds in this issue paid investors 6.7 percent a year. The bonds in this issue were also convertible to 18.5 shares of the company's stock. He then said that the minimum investment was $5,000 and that if she wanted to take advantage of this “once in a lifetime” opportunity, she had to move fast. To Betty, it was an opportunity too good to pass up, and she bit hook, line, and sinker.

She sent the account executive a check—and never heard from him again. When she went to the library to research her bond investment, she found there was no such company as Great Resources Exploration. She lost her $5,000 and quickly vowed she would never invest in bonds again. From now on, she would put her money in the bank, where it was guaranteed.

Over the next four years, she continued to deposit money in the bank and accumulated more than $46,000. Things seemed to be pretty much on track until her certificate of deposit (CD) matured.

When she went to renew the CD, the bank officer told her interest rates had fallen and current CD interest rates ranged between 0.5 and 2 percent.

Betty decided to shop around for higher rates. She called several local banks and got pretty much the same answer. Then a friend suggested that she talk to Peter Manning, an account executive for Fidelity Investments. Manning told her there were conservative corporate bonds and quality stock issues that offered higher returns.

But, he warned her, these investments were not guaranteed. If she wanted higher returns, she would have to take some risks.

While Betty wanted higher returns, she also remembered how she had lost $5,000 investing in fictitious corporate bonds. When she told Peter Manning about her bond investment in the fictitious Great Resources Exploration, he pointed out that she made some pretty serious mistakes. For starters, she bought the bonds over the phone from someone she didn’t know, and she bought them without doing any research. He assured her the bonds and stocks he would recommend were issued by real companies, and she would be able to find a lot of information on each of his recommendations at the library or on the internet. For starters, he suggested the following three investments:

1. A PepsiCo corporate note that pays 2.625 percent annual interest and matures on July 29, 2029. This note has a current market value of $1,110 and is rated A by Moody's.

2. An AT&T corporate note that pays 4.125 percent annual interest and matures on February 17, 2026. This note has a current market value of $1,150 and is rated Baa by Moody's.

3. American Electric Power common stock (listed on the New York Stock Exchange) and selling for $81 a share with annual dividends of $2.96 per share and a current yield of 3.7 percent.

Questions

1. According to Betty Wallace, the chance to invest in Great Resources Exploration was “too good to pass up.”

Unfortunately, it was too good to be true, and she lost $5,000.

Why do you think so many people are taken in by get-rich-quick schemes?

2. Over the past four to five years, investors have been forced to look for ways to squeeze additional income from their investment portfolios. Do you think investing in corporate bonds or notes or quality stocks is the best way to increase income?

Why or why not?

3. Using information obtained in the library or on the internet, answer the following questions about Peter Manning’s investment suggestions.

1. What does the rating for the PepsiCo note mean?

2. What does the rating for the AT&T corporate note mean?

3. How would you describe the common stock issued by American Electric Power?

4. Based on your research, which investment would you recommend to Betty Wallace? Why?

5. Using the internet, a current newspaper, The Wall Street Journal, or Barron’s, determine the current market value for each of the three investments suggested in this case. Based on this information, would these investments have been profitable if Betty had purchased the PepsiCo corporate note for $1,110, the AT&T corporate note for $1,150, or American Electric Power stock for $81 a share?