5. Dedicated fixed-income portfolios
CLIENT #2013-02: Mr. and Mrs. J. A. Barrows (4-6 pages, excluding appendices)
(Extracted from client?s file)
Mr. and Mrs. J. A. Barrows contacted us because they need some help about investing in fixed income. They own their own house; they already have equity investments, and they are considering investing $300,000 in fixed income. They tell us that they are interested in an investing horizon of 20 years (You may change it to 15 years if you cannot find 20
year bonds). We must prepare a report with at least the following information (verbatim from their contact letter):
1. What are the fixed income investments we should consider? Why?
2. How would we invest our funds into long term CD?s? How would we fare in terms of
returns and cash flows?
3. What about immediate annuities? We understand there are lifetime annuities and specified period annuities. We are both 65 years old.
4. What about long term Treasury bonds? How would we fare in terms of returns and cash
5. What about a single, corporate bond issue of the highest quality? How would we fare in
terms of returns and cash flows? If we do this, we would like to see if we could have annual
cash flows over $15,000 per year. Also could you please prepare the following three
a. One showing total preservation of wealth ?that is, we end up with the same amount
of bonds we started with.
b. In the second scenario we would sell bonds each period so that we end up with about
50% of the bonds we initially purchased.
c. In the third scenario, we would like to go on selling an even amount of bonds so that
the initial capital is completely depleted by the end of the investment.
6. How do each of these investments compare with investing in bond mutual funds? What
bond funds would you recommend to us for long term investing?