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Investment Exercises
A Jonathan Brown has £2,000 to invest. Ignoring brokerage and other charges, which of the following will give him the best income yield?
(a) 9% Treasury Stock priced at 85.
(b) 61/2 % Funding Stock priced at 70.
(c) Bank deposit paying 9%.
B In 2001 Jill White wishes to select a gilt-edged stock for a four-year period. She has the choice of:
(a) 4% Exchequer redeemable at par in 2005, priced at 75.
(b) 71/2% Funding redeemable at par in 2009, priced at 84.
Which of these is likely to give a better redemption yield over the next four years, ignoring tax considerations?
Long-term investments
For the really long-term investor, one who is prepared if necessary to have his capital tied up over a period of many years, a long-dated fixed-interest stock bought at a time when interest rates are at a high level is perfectly suitable. But for him there are also other possibilities not open to a short-term investor.
Investment Test Questions
1. What is a gilt-edged stock?
2. In what two ways could you invest in gilt-edged stocks?
3. Are you sure of getting your money back when buying gilts?
4. Why are government stocks of identical maturity dates priced at such different levels on the Stock Exchange?
5. How is the flat income yield calculated on a fixed-interest stock?
6. What is meant by 'redemption yield'?
7. What is the main reason for periodic changes in the general level of prices of gilt-edged stocks?
8. What does the term 'coupon rate' signify?