Miguel, a recent college graduate who heard that you know something about investing, wants to ask about investing in bonds. Miguel indicated that, according to his friends, the stock market was too volatile and bonds were a safer place to invest. Miguel admitted that he really didn’t know much about either stocks or bonds but that he hoped to start saving so that he could purchase a house in the next 5 years. Miguel also mentioned that he had heard about preferred stock and real estate as alternatives to bonds. His roommate recommended that he buy a preferred stock that pays a $4.50 annual dividend or purchase farmland outside his hometown. Answer the following questions in a way that will help Miguel learn investment concepts.
If Miguel thinks that interest rates are going to increase, what type and maturity of bond should he purchase? What type and maturity should he avoid? Why?
Develop a checklist of rules that Miguel should use when purchasing a bond.
If Miguel really wants to purchase real estate to meet his objective, is a direct or indirect real estate investment more appropriate for him? Explain your answer in terms of liquidity, diversification, and safety.