You can invest in 10 corporate bonds paying 7 percent interest 20 conservative stocks that pay substantial dividends(typically 5 percent of the stock price every year) and 30 growth oriented-technology stocks that pay no dividends. Analyze each alternative and select one.
To analyze each alternative and select one, we need to consider the pros and cons of investing in corporate bonds, conservative stocks with dividends, and growth-oriented technology stocks without dividends.
1. Corporate Bonds:
- Interest Rate: Corporate bonds offer a fixed interest rate of 7 percent. This interest is typically paid semi-annually.
- Lower Risk: Bonds are considered less risky than stocks, as they are based on fixed income and companies' creditworthiness.
- No Dividends: Unlike stocks, corporate bonds do not offer regular dividends. The primary source of income is the fixed interest payments.
2. Conservative Stocks with Dividends:
- Dividend Income: Conservative stocks typically pay substantial dividends, representing about 5 percent of the stock price annually.
- Moderate Risk: While stocks carry higher risk than bonds, conservative stocks provide a relatively stable investment option.
- Potential for Capital Appreciation: In addition to dividend income, there is a possibility of capital appreciation if the stocks increase in value.
3. Growth-Oriented Technology Stocks:
- Capital Appreciation Potential: Growth-oriented technology stocks have the potential for significant capital appreciation over time.
- No Dividends: These stocks generally do not pay dividends, as companies prefer to reinvest profits into research and development or expansion.
- Higher Risk: Technology stocks can be more volatile and carry higher risk compared to other investment options.
Considering the above information, selecting one investment option depends on your financial goals, risk tolerance, and time horizon.
If you prefer a stable income stream with lower risk, corporate bonds may be a suitable choice. However, the return might be limited to the fixed interest rate.
If you seek a combination of income and moderate growth potential, conservative stocks with substantial dividends could be appropriate. The dividends provide regular income while still having the possibility of capital appreciation.
On the other hand, if you have a longer time horizon and are willing to take on higher risk for potentially higher returns, growth-oriented technology stocks may be more fitting. However, it's important to note that these stocks can be highly volatile and subject to market fluctuations.
Ultimately, the decision should be based on your individual financial circumstances, risk tolerance, and investment objectives. Consider diversifying your investments across multiple asset classes to reduce risk and maximize potential returns.