Maria owns four par value $1,000 bonds from Prince Waste Collection. The bonds pay yearly interest of 7.7%, and had a market value of 97.917 when she bought them. Maria also owns 126 shares of stock in Prince Waste Collection, each of which cost $19.33 and pays a yearly dividend of 85 cents. Which aspect of Maria’s investment in Prince Waste Collection offers a greater percent yield, and how much greater is it?
Answer
A
The bonds have a yield 3.466 percentage points greater than that of the stocks.
B
The bonds have a yield 7.863 percentage points greater than that of the stocks.
C
The stocks have a yield 6.75 percentage points greater than that of the bonds.
D
The stocks have a yield 9.01 percentage points greater than that of the bonds.
Explanation
Each bond costs 97.917% of its $1,000 par value, or $979.17, and pays $77 in yearly interest (7.7% of $1,000). Its yield is about $77 ÷ $979.17 × 100 = 7.863%. Each stock pays $0.85 on a $19.33 cost, for a yield of about 4.397%. The bond yield is therefore 7.863% − 4.397% = 3.466 percentage points greater, matching choice a.
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