5 Sid earns 100000 per year in BC and has 5000 to invest and

5: Sid earns $100,000 per year in BC and has $5,000 to invest and is looking at two investment options. He could buy 5% preferred shares having a par value and cost of $10 each. These shares pay quarterly dividends and the price will not change during his anticipated holding period. Alternatively, he can buy a Canada Savings bond that has a yield to maturity of 6% that sells at the face value and pays interest semi-annually. Ignore potential capital gains on these investments and focus on income only. A) B) How much income does each investment produce per year? Assuming he can only buy one of the two investments, which one should he buy?

Solution

Yearly Quarterly/Semiannual 1 Income from preference shares 5%*5000 250 62.5 Income from bonds 6%*5000 300 150 2 Based on only income, Sid should invest in bonds which have higher income