Bust The Tipsters! - Case #5: The 12% Yield, By MF Hoyden

Bust The Tipsters!

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Case #5: The 12% Yield
By MF hoyden
Humming "I'm So Excited" under his breath and sitting at the Main Street diner, George Kurtz looked up from this morning's business section to order another black coffee.
"What are you so happy about?" Latecia the waitress said, coyly leaning over his shoulders as she cleared off the remains of his cherry danish.
"Look at this, Lat," George said pointing to the line which showed that Green Light TeleCom <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: GOGO)") else Response.Write("(Nasdaq: GOGO)") end if %> was up $2.00 from the day before. "I'm gonna be so rich. Everyday I check to see how they're doing and everyday they've gone up more."
"I'm so proud of you George," Lat murmered, while swishing her short skirt as she wiped off the table. "How did you find such a great company? Do you know anything about Green Light?"
"Nah... actually, I was in here a couple of weeks ago and struck up a conversation with that broker, you know, the known as the 'Churner,' over at 'Wiess, Wisser, & Wyzest.' He told me that this was a solid company and that he could get me some of their bonds. They have a 12% yield and don't mature for ten years. So I bought $20,000 worth. I haven't figured it out yet, but I've gotta be making a mint!"
"Wow, the Churner can really call 'em. Latecia smiled, running her hands through her hair. We, uh, you should give him something for his trouble."
Just then George's new neighbor Motley Fool slid into the booth next to Latecia. "We need to give him something all right Lat... but I think it should be a piece of my mind."
"Why Motley? Didn't The Churner do a good job?"
Motley tossed the corner of his tri-tipped hat over his shoulder. "Nope, Lat... he did an awful job of explaining to George exactly what he was buying."
Why does Motley think that The Churner did a bad job?
1) A 12% return on a $20,000 investment is too low for a telecom firm.
2) As a bond holder, George will not benefit if the stock price goes up.
3) A $2 stock gain will actually lower the return on the bonds.
4) A $2 stock gain is not a high enough return to justify a 12% return.

The answer is....
2) "Lat, I don't know whether Green Light is great or not. My point is that Jack didn't explain to George clearly enough that what he was buying was the company's bonds, not their stock," Motley said as he drank the rest of George's coffee.
"When you own stock in a company you are part owner. If the price of the stock goes up you would have a gain if you decided to sell it. But if you buy the bonds of a company, you are, in effect, lending them money. The return on the bond is the company paying you back. They will pay you interest on the loan twice a year and at the end of a set time, they will give you the principal back.
"In this case, George will receive two checks each year for $1,200. $1,200 twice a year would equal $2,400 annually, which is 12% of the $20,000 that George lent to GOGO. And at the end of 10 years, GOGO will give back to George his $20,000.
"But whether the stock price goes up or down, that won't affect the amount of interest that George will receive each year. That will always remain the same."
George squirmed as he realized that not only had he been misled by Jack, but that Latecia was handing Fool her phone number.

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RULES & PRIZES \| HEROES & VILLAINS \| STANDINGS \| ARCHIVE
Case #5: The 12% Yield By MF hoyden Humming "I'm So Excited" under his breath and sitting at the Main Street diner, George Kurtz looked up from this morning's business section to order another black coffee. "What are you so happy about?" Latecia the waitress said, coyly leaning over his shoulders as she cleared off the remains of his cherry danish. "Look at this, Lat," George said pointing to the line which showed that Green Light TeleCom <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: GOGO)") else Response.Write("(Nasdaq: GOGO)") end if %> was up $2.00 from the day before. "I'm gonna be so rich. Everyday I check to see how they're doing and everyday they've gone up more." "I'm so proud of you George," Lat murmered, while swishing her short skirt as she wiped off the table. "How did you find such a great company? Do you know anything about Green Light?" "Nah... actually, I was in here a couple of weeks ago and struck up a conversation with that broker, you know, the known as the 'Churner,' over at 'Wiess, Wisser, & Wyzest.' He told me that this was a solid company and that he could get me some of their bonds. They have a 12% yield and don't mature for ten years. So I bought $20,000 worth. I haven't figured it out yet, but I've gotta be making a mint!" "Wow, the Churner can really call 'em. Latecia smiled, running her hands through her hair. We, uh, you should give him something for his trouble." Just then George's new neighbor Motley Fool slid into the booth next to Latecia. "We need to give him something all right Lat... but I think it should be a piece of my mind." "Why Motley? Didn't The Churner do a good job?" Motley tossed the corner of his tri-tipped hat over his shoulder. "Nope, Lat... he did an awful job of explaining to George exactly what he was buying." Why does Motley think that The Churner did a bad job? 1) A 12% return on a $20,000 investment is too low for a telecom firm. 2) As a bond holder, George will not benefit if the stock price goes up. 3) A $2 stock gain will actually lower the return on the bonds. 4) A $2 stock gain is not a high enough return to justify a 12% return.
The answer is.... 2) "Lat, I don't know whether Green Light is great or not. My point is that Jack didn't explain to George clearly enough that what he was buying was the company's bonds, not their stock," Motley said as he drank the rest of George's coffee. "When you own stock in a company you are part owner. If the price of the stock goes up you would have a gain if you decided to sell it. But if you buy the bonds of a company, you are, in effect, lending them money. The return on the bond is the company paying you back. They will pay you interest on the loan twice a year and at the end of a set time, they will give you the principal back. "In this case, George will receive two checks each year for $1,200. $1,200 twice a year would equal $2,400 annually, which is 12% of the $20,000 that George lent to GOGO. And at the end of 10 years, GOGO will give back to George his $20,000. "But whether the stock price goes up or down, that won't affect the amount of interest that George will receive each year. That will always remain the same." George squirmed as he realized that not only had he been misled by Jack, but that Latecia was handing Fool her phone number.