Diana is trying to choose a broker who will help her purchase a par value $1,000 corporate bond from Deegan Pharmaceuticals. Broker P charges a commission of 4.4% of the market value of each bond purchased, and Broker Q charges a flat fee of $32.50 for each bond purchased. If bonds from Deegan Pharmaceuticals are selling at 104.682, which broker will give Diana the better deal, and by how much?
Answer
A
Broker P’s commission will be $9.47 less than Broker Q’s.
B
Broker P’s commission will be $27.89 less than Broker Q’s.
C
Broker Q’s commission will be $13.56 less than Broker P’s.
D
Broker Q’s commission will be $11.50 less than Broker P’s.
Explanation
A bond quoted at 104.682 sells for 104.682% of its $1,000 par value: $1,046.82. Broker P’s 4.4% commission is about $46.06, while Broker Q charges $32.50. Broker Q’s fee is $46.06 − $32.50 = $13.56 less, so Broker Q gives Diana the better deal.
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