Case: FRANK AND LUCILLE DEVELOP A BOND INVESTMENT PROGRAM
Frank and Lucille Lasnicka, along with their two teenage sons, Lou and Lamar, live in Como, NSW. Frank works as an electronics salesman, and Lucille is a personnel officer at a local bank; together they earn an annual income of around $75 000. Frank has just learned that his recently departed rich uncle has named him in his will to the tune of some $250 000 after taxes. Needless to say, the Lasnickas are elated. Frank intends to spend $50 000 of his inheritance on a number of long-overdue family items (for example, some badly needed remodelling of their kitchen and family room, and the down-payment on a new Porsche Boxster); he wants to invest the remaining $200 000 in various types of fixed-income securities. Frank and Lucille have no unusual income requirements or health problems. Their only investment objectives are that they want to achieve some capital appreciation, and they want to keep their funds fully invested for a period of at least 20 years. They would rather not have to rely on their investments as a source of current income but want to maintain some liquidity in their portfolio just in case.
Consider the following questions:
1. Describe the type of bond investment program you think the Lasnickas should follow. In answering this question, give appropriate consideration to both return and risk factors.
2. List several different types of bonds that you would recommend for their portfolio, and briefly indicate why you would recommend each.