Question 1: Consider the bonds of IBM: coupon 1%, term 3 years, issued in August 2010. Why do...

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Question 1: Consider the bonds of IBM: coupon 1%, term 3 years, issued in August 2010. Why do investors buy these bonds with only 1% rate of return? Give some reasons to justify your answer.Question 2: IBM stock sells at about $195 per share and pays an annual dividend of $3.40. What is its annual dividend yield? Would you rather buy the stock or the bonds of IBM? Give some reasons.
	
Document Preview: Question 1: Consider the bonds of IBM: coupon 1%, term 3 years, issued in August 2010. Why do investors buy these bonds with only 1% rate of return? Give some reasons to justify your answer.Question 2: IBM stock sells at about $195 per share and pays an annual dividend of $3.40. What is its annual dividend yield? Would you rather buy the stock or the bonds of IBM? Give some reasons.

Robert · Accepted Answer

Question 1: 
 The bonds are almost risk free bonds. Though the rate of return is only 1% the bond is risk free 
in the sense that investors looking for safety of their investments and those who are risk averse 
and are conservative in their choice of investment decisions will look in for the security of their 
investment rather than the rate of return and corporate finance rules say that higher the risk 
higher the returns. Hence IBM bonds are a safe source because of the nature of the risk that is 
seen in the bonds.

Question 1: Consider the bonds of IBM: coupon 1%, term 3 years, issued in August 2010. Why do investors buy these bonds with only 1% rate of return? Give some reasons to justify your answer.Question...

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