Jim wants to start investing in bonds. He checks with two brokers to ask them for suggestions of bonds to buy. Broker J, who charges a commission of 3.6% of the market value of all bonds sold, recommends for Jim to buy three par value $500 bonds from the city of Danville, a par value $1,000 bond from Raxin Accounting, and two par value $1,000 bonds from United Rotators. Danville bonds are selling at 114.212, Raxin Accounting bonds are selling at 79.941, and United Rotators bonds are selling at 102.844. Broker K, who charges a fee of $28 for each bond sold, recommends that Jim buy five par value $500 bonds from Fort Bend County, a par value $1,000 bond from the U.S. Treasury, and two par value $500 bonds from Iwad Records. Fort Bend bonds are selling at 91.090, Treasury bonds are selling at 101.163, and Iwad Records bonds are selling at 107.252. Based on the current information, which broker’s bond package will cost Jim less money up front, and how much less will it cost him?
Answer
A
Broker J’s suggestion will cost Jim $59.57 less than Broker K’s suggestion.
B
Broker J’s suggestion will cost Jim $62.00 less than Broker K’s suggestion.
C
Broker K’s suggestion will cost Jim $148.57 less than Broker J’s suggestion.
D
Broker K’s suggestion will cost Jim $208.07 less than Broker J’s suggestion.
Explanation
Bond prices are quoted as a percentage of par value. Broker J’s bonds cost $4,569.47 before commission; adding 3.6% ($164.50) gives $4,733.97. Broker K’s bonds cost $4,361.40 before fees; eight bonds at $28 each add $224, for a total of $4,585.40. Broker K’s package costs $4,733.97 − $4,585.40 = $148.57 less, matching the choice that says Broker K’s suggestion will cost $148.57 less.
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