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Chapter 1
The Investment Environment
◼ Outline
Learning Goals
I. Investments and the Investment Process
A. Attributes of Investments
1. Securities or Property
2. Direct or Indirect
3. Debt, Equity, or Derivative Securities
4. Low- or High-Risk Investments
5. Short- or Long-Term Investments
6. Domestic or Foreign
B. The Structure of the Investment Process
Concepts in Review
II. Types of Investments

A. Short-Term Investments
B. Common Stock
C. Fixed-Income Securities
1. Bonds
2. Convertible Securities
3. Preferred Stock
D. Mutual Funds
©2017 Pearson Education, Inc.
2 Smart/Gitman/Joehnk • Fundamentals of Investing, Thirteenth Edition
E. Exchange-Traded Funds
F. Hedge Funds
G. Derivative Securities
1. Options
2. Futures
H. Other Popular Investments
Concepts in Review
III. Making Your Investment Plan

A. Writing an Investment Policy Statement
1. Summarize your current situation
2. Specify your investment goals
3. Step 3: Articulate your investment philosophy
4. Step 4: Set investment selection guidelines
5. Step 5: Assign responsibility for selecting and monitoring investments
B. Considering Personal Taxes
1. Basic Sources of Taxation
2. Types of Income
a. Ordinary Income
b. Capital Gains and Losses
3. Investments and Taxes
4. Tax-Advantaged Retirement Savings Plans
C. Investing over the Life Cycle
D. Investments and the Business Cycle
Concepts in Review
IV. Meeting Liquidity Needs with Short-Term Investments

A. Role of Short-Term Investments
1. Interest on Short-Term Investments
2. Risk Characteristics
3. Advantages and Disadvantages of Short-Term Investments
B. Common Short-Term Investments
C. Investment Suitability
Concepts in Review
V. Careers in Finance
A. Commercial Banking
B. Corporate Finance
C. Financial Planning
D. Insurance
E. Investment Banking
F. Investment Management

Chapter 1 The Investment Environment 3
Concepts in Review
Summary
Key Terms
Discussion Questions
Problems
Case Problems
1.1 Investments or Golf?
1.2 Preparing Carolyn Bowen’s Investment Plan
Excel @Investing
◼ Key Concepts
1. The meaning of the term investment and the implications it has for individual investors
2. Review the factors used to differentiate between different types of investments
3. The importance of and basic steps involved in the investment process
4. Popular types of investments including short-term investments, common stock, mutual funds and
exchange-traded funds, fixed-income securities such as bonds, preferred stock, and convertibles
5. Derivative securities such as options and futures
6. Other popular investments such as real estate, tangibles, and tax-advantaged investments
7. Writing an investment plan
8. Building a diversified portfolio consistent with investment goals
9. Sources of taxation, types of taxable income, and the effect of taxes on the investor
10. Developing an investment program that considers differing economic environments

and the life cycle
11. The use of short-term securities in meeting liquidity needs
12. The merits and suitability of various popular short-term investments, including deposit accounts and
money market securities
◼ Overview
This chapter provides an overview of the scope and content of the text.
1. The term investment is defined, and the alternative investment opportunities available to investors are
classified by types.
2. The structure of the investment process is examined. This section explains how the marketplace
brings together suppliers and demanders of investment funds.

3. The key participants in the investment process—government, business, and individuals—are

described, as are institutional and individual investors.
4. Returns are defined as rewards for investing. Returns to an investor take two forms—current income
and increased value of the investment over time. In this section, the instructor need only define
return, since there will be another opportunity to develop the concept of return in Chapter 4; also,
providing information about recent investment returns always engages students’ attention.
5. Next, the following investments available to individual investors are discussed: short-term
investments common stock, fixed-income securities, mutual funds, exchange-traded funds, hedge
funds, real estate, tangibles, tax-advantaged investments, and options and futures. The text describes
their risk-return characteristics in a general way. The instructor may want to expand on the
advantages and disadvantages of investing in each, although they will be treated in greater detail in
subsequent chapters. It is vital for any investor to establish investment goals that are consistent with
his or her overall financial objectives.
6. Writing an investment plan involves summarizing one’s current situation, specifying investment
goals, articulating an investment philosophy, setting investment selection guidelines, and assigning
responsibility for selecting and monitoring investments.
7. Personal taxes are discussed in terms of types of income and tax rates. The investment process is
affected by current tax laws. Examples of tax shelters, especially tax-advantaged retirement vehicles,
and tax planning are provided.
8. Once investment goals are established, it is important to understand how the investment process is
affected by different economic environments. The chapter talks about types of investments such as
stocks, bonds, and tangibles as they are affected by business cycles, interest rates, and inflation.
9. Liquidity is defined, and short-term securities that can be used to meet liquidity requirements are
described. The discussion includes a look at short-term interest rates and the risk characteristics of
various short-term securities.
10. The next section covers the various types of short-term vehicles available to today’s investor. The
text provides enough detail about everything from passbook accounts to money market funds to
commercial paper that students should get a good grasp of the differences between the vehicles.
Information on current rates brings realism into the classroom and enhances student perception of the
lecturer as a knowledgeable instructor.
◼ Answers to Concepts in Review

1.1 An investment is any asset into which funds can be placed with the expectation of preserving or
increasing value and earning a positive rate of return. An investment can be a security or a property.
Individuals invest because an investment has the potential to preserve or increase value and to earn
income. It is important to stress that this does not imply that an investment will in fact preserve value
or earn income. Investing often involves taking risk, so an investment’s actual performance will often
differ from its expected performance.
1.2 (a) Securities and property are simply two classes of investments. Securities are investments issued
by firms, governments, or other organizations that represent a legal claim on the resources of the
issuer. For example, a bond represents a loan that the borrower is legally obligated to repay, and
a stock represents a proportionate ownership in a firm. An option, on the other hand, represents
the legal right to either buy or sell an asset at a predetermined price within a specified time

period. Property constitutes investments in either real property (land and buildings) or tangible
personal property (e.g., Rembrandt paintings, Ming vases, or antique cars).
(b) With a direct investment, an individual acquires a direct claim on a security or property. For
example, an investment in one share of IBM stock directly provides the stockholder a proportionate
ownership in IBM. An indirect investment provides an indirect claim on a security or property.
For example, if you bought one share of Fidelity Growth Fund (a mutual fund), you are in effect
buying a portion of a portfolio of securities owned by the fund. Thus, you will have a claim on a
fraction of an entire portfolio of securities.
(c) An investment in debt represents funds loaned in exchange for the receipt of interest income and
repayment of the loan at a given future date. The bond, a common debt instrument, pays specified
interest over a specified time period, then repays the face value of the loan. (Chapters 10 and
11 cover bonds in detail.) An equity investment provides an investor an ongoing fractional
ownership interest in a firm. The most common example is an investment in a company’s
common stock. We will study equity instruments in greater detail in Chapters 6 through 8.
Derivative securities are securities derived from debt or equity securities and structured to exhibit
characteristics and value based upon the underlying securities. Options are derivative securities
that allow an investor to sell or buy another security or asset at a specific price over a given time
period. For example, an investor might purchase an option to buy Facebook stock for $50 within
nine months.
(d) Short-term investments typically mature within one year while long-term investments have
longer maturities, including common stock, which has no maturity at all. However, long-term
investments can be used to satisfy short-term financial goals.
1.3 Investors expect to be paid for accepting risk. Low or no risk investments typically offer low rates of
return while riskier investments, meaning that returns are less predictable, tend to offer potentially
higher returns.
1.4 In finance, risk reflects the uncertainty surrounding the return that an investment will generate. Risk
refers to the chance that the return from an investment will differ from its expected value. Low-risk
investments are those considered safe with respect to the return of funds invested and the receipt of a
positive rate of return. High-risk investments are those that have more uncertain future values and
levels of earnings.
1.5 Foreign investments are investments in the debt, equity, derivative securities of foreign-based
companies, and property in a foreign country. Both direct and indirect foreign investments sometimes
provide investors more attractive returns or lower-risk investments compared to purely domestic
investments, but beyond that they are useful instruments to diversify a purely domestic portfolio.
1.6 The investment process brings together suppliers and demanders of funds. This may occur directly
(as with property investments). More often the investment process is aided by a financial institution
(such as a bank, savings and loan, savings bank, credit union, insurance company, or pension fund)
that channels funds to investments and/or a financial market (either the money market or the capital
market) where transactions occur between suppliers and demanders of funds.
1.7 (a) The various levels of government (federal, state, and local) generally require more funds for
projects and debt repayment than they receive in revenues. Thus, governments are net demanders
of funds. Governments also demand funds when the timing of their revenues does not match their
expenditures. The term net refers to the fact that, while governments both supply and demand
funds in the investment process, on balance they demand more than they supply.

(b) Businesses are also net demanders, requiring funds to cover short- and long-term operating and
investment (growth) needs. While business firms often supply funds, on balance they also
demand more than they supply.
(c) Individuals are the net suppliers of funds to the investment process. They put more funds into the
investment process than they take out. Individuals play an important role in the investment
process—supplying the funds needed to finance economic growth and development.
1.8 Institutional investors are investment professionals who are paid to manage other people’s money.
They are employed by financial institutions like banks and insurance companies, by nonfinancial
businesses, and by individuals. Individual investors manage their own personal funds in order to meet
their financial goals. Generally, institutional investors tend to be more sophisticated because they
handle much larger amounts of money, and they tend to have a broader knowledge of the investment
process and available investment techniques .
1.9 Short-term investments usually have lives of less than one year. These investments may be used to
“warehouse” temporarily idle funds until suitable long-term investments are found. Due to their
safety and convenience, they are popular with those who wish to earn a return on temporarily idle
funds or with the very conservative investor who may use these short-term investments as a primary
investment outlet. In addition to their “warehousing” function, short-term investments provide
liquidity—they can be converted into cash quickly and with little or no loss in value. This
characteristic is very useful when investors need to meet unexpected expenses or take advantage of
attractive opportunities.
1.10 Common stock is an equity investment that represents a fractional ownership interest in a corporation.
The return on a common stock investment derives from two sources: dividends, which are periodic
payments made by the firm to its shareholders from current and past earnings, and capital gains,
which result from selling the stock at a price above the original purchase price. Because common
stock offers a broad range of return-risk combinations, it is one of the most popular investments s.
1.11 a. Bonds are debt obligations of corporations or governments. A bondholder receives a stated
interest return, typically semi-annually, plus the face value at maturity. Bonds are usually issued
in $1,000 denominations, pay semi-annual interest, and have 10 - to 30-year maturities. Bonds
offer fixed/certain returns, if held until maturity.
b. A convertible security is a fixed-income security, either a bond or preferred stock, which has a
conversion feature. Typically, it can be converted into a specified number of shares of common
stock. Convertible securities are quasi-derivative securities, as their market value would depend
on the price of the common stock and the conversion ratio.
c. Preferred stock is very much like common stock in that it represents an ownership interest in a
corporation. But preferred stock pays only a fixed stated dividend, which has precedence over
common stock dividends, and does not share in other earnings of the firm.
d. A mutual fund is a company that invests in a large portfolio of securities, whereas a money
market mutual fund is a mutual fund that solely invests in short term “money market” securities .
Investors might find mutual funds appealing because a large, well-diversified portfolio may be
more consistent with their investment goals in terms of risk and return. As we will see later, a
mutual fund offers the investor the benefits of diversification and professional management.
Mutual funds do not offer fixed/certain returns. Exchange-traded funds are similar to mutual
funds but are traded throughout the day on exchanges and priced continuously.

e. Similar to mutual funds, hedge funds pool investors’ funds to invest in securities, but hedge funds
are open to a narrower group of investors than mutual funds. Hedge funds may employ high-risk
strategies. They do not offer a fixed return and the management fees are much higher than for
typical mutual funds. Although the term hedge implies limiting risks with derivatives, many
hedge funds use derivatives to increase leverage rather than for managing risk.
f. Options are derivative securities that provide holders the right to buy or sell another security
(typically stock) or property at a specified price over a given time period. Factors like the time
until expiration, the underlying stock price behavior, and supply and demand conditions affect
the returns.
g. Futures represent contractual arrangements in which a seller will deliver or a buyer will take
delivery of a specified quantity of an asset at a given price by a certain date. Unlike an option,
which gives the investor the right to purchase or sell another security, futures contracts obligate
the investor to deliver or take delivery of the asset. The primary factor affecting returns on
commodity contracts is the price of the underlying asset.
1.12 Before establishing an investment program, an investor should write down an Investment Policy
Statement. The elements of this statement include an overview of the investor’s current situation, a
description of the investor’s goals and investment philosophy, a list of investment selection
guidelines, and a statement explaining how, when, and by whom the investment portfolio will be
monitored.
1.13 Federal income taxes are charged against all income individuals receive from all sources (with the
exception of interest received on some bonds issued by state and local governments).
a. Active (ordinary “earned”) income is the broadest category and includes income from wages,
salaries, bonuses, tips, pension income, and alimony. It is made up of income earned on the job
as well as most other forms of noninvestment income.
b. Portfolio (investment) income is earnings generated from various types of investment holdings.
For the most part, it consists of interest, dividends, and capital gains earned on most types of
investments. Passive income is a special category that consists of income derived chiefly from
real estate, limited partnerships, and other forms of tax shelters.
c. Capital gains are the profits earned on the sale of capital assets—pleasure or investment. They
are measured by the amount by which the proceeds from the sale of the capital asset exceed its
original purchase price. Currently, long-term capital gains are taxed at preferential rates to
ordinary income. Capital gains are appealing to investors because they are not taxed until they
are actually realized.
d. A capital loss is the amount by which the proceeds from the sale of a capital asset are less than
its original purchase price. Up to $3,000 of net losses can be applied against ordinary income in
any one year, with the unused portion carried forward to offset future income.
e. Due to the opportunities and challenges created by the tax laws, tax planning is an important part
of the investment process. Tax planning involves looking at an individual’s current and projected
earnings and developing strategies that will defer or minimize the level of his or her taxes. Tax
plans involve current income, capital gains, or tax-sheltered investments. For example, one
strategy is to take losses as they occur and to delay realizing profits in order to minimize current
taxable income.
f. In general, tax-advantaged retirement plans allow individuals to defer taxes on the contribution
and/or portfolio earnings until some future date when retirement withdrawals take place. There
are employer-sponsored plans (such as 401(k) accounts), individual-created plans (such as Keogh
plans), and individual retirement accounts (IRAs).

1.14 Investors tend to follow different investment strategies as they move through different stages of their
life cycle.
a. Young investors, ages 20 to 45, tend to prefer growth-oriented investments that stress capital
gains rather than income. These investors have little investable funds, and capital gains are seen
as the quickest way to build up investment capital.
b. By middle age, ages 45 to 60, there is a consolidation taking place as family demands and
responsibilities change. While growth-oriented securities are still used, investing becomes less
speculative or aggressive. Quality-growth investments are employed, and more attention is given
to current income. The foundation is being set for retirement.
c. As the investor moves into the retirement years, age 60 on, preservation of capital and current
income become the principal concerns. High-quality stocks and bonds and money market
instruments are used as the investor’s objective is to live as comfortably as possible from
the investment income. During retirement, one tries to reap the rewards of a lifetime of saving
and investing.
1.15 Stocks and equity-related securities (such as mutual funds and convertibles) are highly responsive to
the economic cycle. During recovery and expansion, stock prices are up. As the decline approaches,
stock prices begin to decline as well. Growth-oriented and speculative stocks tend to do especially
well in an expanding economy.
1.16 An asset is liquid if it can be converted to cash (sold) easily and quickly, with little or no loss in
value. You would want to hold liquid assets as emergency funds or to accumulate funds for some
specific purpose. IBM stock is a liquid investment. IBM common shares are heavily traded, and
investor can sell IBM shares quickly without incurring high transactions costs or triggering a decline
in the value of the shares. Keep in mind, however, that the value of IBM shares fluctuate, so it is not
necessarily a safe investment even though it is a liquid investment. Common stock is not always a
liquid investment. Some stocks are not heavily traded, so selling shares in some companies would
trigger significant transactions costs and perhaps even a decline in the value of the shares.
1.17 Purchasing power risk for short-term investments occurs when the rate of return on these investments
falls short of the inflation rate. This generally happens to fixed-rate investments such as passbook
savings accounts. Most other short-term investments have managed to provide rates of return about
equal to the inflation rate when one looks at these short-term rates over long periods of time. Default
(nonpayment) risk is very small with most high quality or money market short-term investments. The
deposits in banks and other federally insured savings institutions are protected up to $250,000 per
account by the Federal Deposit Insurance Corporation, an agency of the federal government. U.S.
Treasury bills are perfectly safe and sometimes called a risk-free investment. Commercial paper and
repurchase agreements are extremely safe, based upon past experience, even though there have been
rare instances of problems. These latter two instruments are also not insured. Money market mutual
funds have also had an exceptionally safe history. Of course, the safest money market funds are those
that invest solely in government securities and are virtually default-risk-free.
1.18 Passbook savings accounts and NOW accounts (a checking account), offered by banks, generally pay
a low rate of interest and have no minimum balance. Passbook savings and NOW accounts are
primarily used by investors as savings accounts, providing the investor with a highly liquid pool of
funds. MMDAs are bank deposit accounts with limited check-writing privileges. Asset management
accounts are comprehensive deposit accounts and combine checking, investing, and borrowing
activities. MMDAs and asset management accounts are more likely used by investors to earn a
competitive short-term return while maintaining liquidity. Each type of account, except for asset
management accounts, is insured. All but the passbook account typically require a minimum balance,
which varies.

1.19 a. I bonds are savings bonds issued by the U.S. Treasury. They earn interest at a rate that varies
with inflation. Interest is exempt from state and local taxes. They are issued in denominations
that make them affordable to everyone and mature in 30 years but can be redeemed after one
year.
b. U.S. Treasury bills are short-term (less than one year) debt obligations of the federal government.
T-bills are exempt from state and local income taxes. They are regarded as the safest but
generally lowest yielding of all investments, and the secondary
market for T-bills is highly liquid.
c. Certificates of deposits (CDs) are savings instruments that must remain on deposit for a specified
period. Premature withdrawals incur interest penalties. Because of the requirement that they
remain on deposit, CDs are less liquid than T-bills, but they are convenient to buy and hold, offer
competitive returns, and have federal insurance protection.
d. Commercial paper is unsecured short-term debt issued by corporations with very high credit
standings. The secondary market for commercial paper is very limited and yields are comparable
to yields on large-denomination CDs. Typically, only larger institutions deal directly in this
market because the denominations range from $25,000 to the more commonly issued $100,000.
Commercial paper is not federally insured.
e. Bankers’ acceptances are short-term credit arrangements between business firms and banks.
Firms use banker’s acceptances to finance transactions, most often involving firms in foreign
countries or firms with unknown credit capacities. Banker’s acceptances typically are
denominated in $100,000 units, are low-risk securities, and have active secondary markets.
Yields are slightly below CD yields and commercial paper and above T-bills.
f. Money market mutual funds (MMMFs) pool capital of many investors and invest it exclusively in
high-yielding, short-term securities, such as T-bills, large CDs, commercial paper, and other
similar “money market” securities. Because these high-yielding securities are in denominations
of $10,000 to $1 million, the MMMF makes them available in a format that is affordable to
individual investors. MMMFs are convenient, offer check writing privileges, and yields are based
on the ability of the fund manager to invest in various short-term securities. Although they are
not federally insured funds, their default risk is nearly zero because the securities they invest in
are very low risk and the fund is relatively diversified.
1.20 The senior managers in a corporation, such as the chief financial officer (CFO), have the primary
responsibility of managing the firm’s capital resources and investments. Because so much of the
CFO’s primary responsibilities require an understanding of investment principles, a CFO must
understand market forces but more importantly communicate in such a way that investors understand
the value of the firm and the securities the firm has issued.
1.21 Because insurance companies have large sums of investment capital under management, they require
the skills of a highly trained finance person in investment principles. Since this person is asked to
manage risk for individuals as well as businesses, the decisions they make and the strategies they
devise will assist the insurance companies’ customers in the creation of their individual successful
asset and risk management strategies.
◼ Suggested Answers to Discussion Questions

1.1 a. Since you fall into the category of a young investor, after meeting basic liquidity needs your key
investment goals should be to save for the education of your children and quite possibly to
purchase a house.. Appropriate investments should focus on longer term goals, such as the
education of your children and, though it may seem remote, retirement.

b. You should consider the effects of taxes when investing, maximizing your use of tax sheltered
investments such as 401(k) plans and taking advantage of the preferential tax treatment of capital
gains and dividends and. Your focus should be on maximizing the after-tax return on your
investments. You should also take into consideration the considerable tax advantages of home
ownership.
c. Since you have a relatively long investment horizon, it is appropriate to focus your portfolio on
higher-risk investments such as common stocks.
1.2 Short-term investments play an important part in your investment program. Most importantly, they
will provide a pool of reserves that can be used for emergencies such as replacing cars, appliances,
and clothing that wear out over time. You should bear in mind that earnings on safe, short-term
investments were well below the inflation rate during the period 2009-2015 and may continue to fall
short of inflation for some time into the future.
Minimum Federal Method and Ease of

Type of Investment Balance Interest Rate Insurance Withdrawing Funds
a. Passbook savings None Close to 0.00% Yes, up to In person or through
account in recent years. $250,000 per teller machines; very
account easy
b. NOW account No legal At or near Yes, up to Unlimited check-
minimum, but passbook rates $250,000 per writing privileges
often set at account
$500 or $1,000
c. Money market No legal Slightly above Yes, up to Limited check-
deposit account minimum, but passbook rates $250,000 per writing privileges
(MMDA) often set at account
$2,500
d. Asset management Typically Similar to Yes, up to Limited check-
account $5,000 to MMDAs $250,000 in writing privileges
$20,000 banks, varies
elsewhere
e. Series I savings bond Initial deposit is At or near No, but federal Penalty of three
50% of face 0.00% in recent government months interest for
value years. issue early withdrawal
f. U.S. Treasury bill $100 Slightly above No, but federal Secondary market
passbook and government exists
NOW accounts issue
g. Certificate of deposit Tailored to Slightly above No, but as Penalty for early
investor needs asset secure as most withdrawal
management bank savings
account and checking
accounts
h. Commercial paper $100,000 plus. Comparable to No Very liquid
Often included certificates of
in MMMF deposit
portfolios

Minimum Federal Method and Ease of

Type of Investment Balance Interest Rate Insurance Withdrawing Funds
i. Banker’s acceptance Large denomi- Comparable to No Active secondary
nations; not a certificates of market, but not open
typical retail deposit to individual
investment investors except
through funds
j. Money market No legal Slightly below No, but invests May take a few days
mutual fund (money minimum passbook in government to receive check from
fund) savings account and bank issues fund
◼ Solutions to Problems
1.1 a. Goal $500,000
$44,300 at 8% for 25 yrs. 150,000
Additional requirement $350,000
b. Saving $104.75 each year produces $5,000 in savings at retirement, but Stefani needs to
accumulate 70 times that much ($350,000 is 70 times greater than $5,000). Stefani needs to save
70 times $104.74, or $7,332.50 each year. If she does, then the combined value at age 65 of all of
her assets will be very close to $500,000.
1.2 a. Tax on the Smith’s income of $130,000. Looking at the joint tax return rates, we find:
(10%  $18,150) + [15%  ($73,800 − $18,150 + [25%  ($130,000 − 73,800]
= $24,212.50
Tax on the Jones’s income of $65,000. Looking at the joint tax return rates, we find:
(10%  $18,150) + [15%  ($65,000 − $18,150)]
= $8,842.50
b. The Smith’s make twice as much as the Joneses.
The ratio of the Smith’s to the Jones’s taxable income is ($130,000/$65,000) = 2
The ratio of the Smith’s to the Jones’s taxes is ($24,212.50/$8,842.50) = 2.74.
Hence higher income earners pay a higher proportion of their income as tax.
1.3 a. $50,000/$50 = 1,000 shares of stock.

b. 1,000 shares  $2 = $2,000 per year before tax. $2,000  0.85 = $1,700 after tax.
c. ($1,700  10) + $50,000 = $67,000.
d. $50,000  0.05 = $2,500 per year before tax. $2,500  0.67 = $1,675 after tax.
e. ($1,675  10) + $50,000 = $66,750.
f. Assuming that the Consalvos have 100% confidence in their forecasted price and dividends, they
should purchase the stock. Even though the annual interest from the bonds is more than the
dividend income from the stock, after taxes the Consalvos will have more money from the
dividend income than from the interest income.
1.4 a. Their ordinary income is $128,000, consisting of $125,000 of salary and wages, $1,000 in
interest income, and $2,000 of short-term capital gains.

Mike and Julie will be in the 25% marginal tax bracket based on their taxable income, which
includes the ordinary income and the other investment income ($3,000 in dividends and $2,000
in long-term capital gains). Therefore, on the $1,000 of interest income they will pay $250 in tax.
b. The $3,000 in dividends is subject to the lower 15% tax rate, so they will pay $450 in taxes on
their dividend income.
c. This is a long-term capital gain and is therefore subject to tax at 15% given the Bedard’s tax
bracket. They will pay $300 in taxes on this gain.
This gain is a short-term capital gain and is taxed like ordinary income. Since the Bedard’s are in the
25% tax bracket, they will be $500 in taxes on this $2,000 gain.
1.5 a. If they remain single, their tax bills will be the same because they make the same income. So
each will pay:
0.10($9,075) + 0.15($36,900 - $9,075) + 0.25($70,000 - $36,900) = $907.5 + $4,173.50 + $8,275
= $13,356.25
Their total tax bill will be double this amount, or $26,712.50.
If they are married, their combined income will be $140,000. Using the tax brackets for married
taxpayers filing joint returns, their taxes will be:
0.10($18,150) + 0.15($73,800 - $18,500) + 0.25($140,000 - $73,800) = $1,815 + $8,347.50 +
$16,550 = $26,712.50.
In this case, Kim and Kanye pay the same total taxes whether they are married or single.
b. If they remain single, they will each pay the following in taxes:
0.10($9,075) + 0.15($36,900 - $9,075) + 0.25($89,350 - $36,900) + 0.28($100,000 - $89,350) =
$21,175.75
So their combined tax bill is double that amount or $42,351.50.
As a married couple, here is their tax bill:
0.10($18,150) + 0.15($73,800 - $18,150) + 0.25(148,850 - $73,800) + 0.28($200,000 - $148,850)
= $43,247
Notice that in this scenario, Kim and Kanye pay a "marriage penalty" because their combined
taxes are higher when they are married than when they are single. The reason for this is that the
income levels that define the upper bound of each tax bracket are not always twice as much for
married couples as for single tax payers. For example, for single taxpayers, the upper limit of the
10% income tax bracket is $9,075, and for married filers that upper limit is $18,150, exactly
double the limit for single taxpayers. However, look at the 25% tax bracket. For singles, that
bracket ends at an income level of $89,350. Therefore, you might expect that the 25% tax bracket
for married couples would end at $178,700 (2 X $89,350), but in fact the upper income limit is
just $148,850. This means that, at least in the example of Kim and Kanye, married taxpayers
begin paying tax at the 28% rate at a lower income level than they would if they were single.

◼ Solutions to Case Problems

Case 1.1 Investments or Golf?
This case illustrates the many facets of the investment process; it involves much more than common stock.
The authors recognize the value of physical education and emphasize the importance of sports, but a course
in investments offers the student a lifetime of financial benefits. Thus, our arguments for selecting the
investments course should not be interpreted as a negative statement on physical education but rather as a
positive discussion of the merits of investments.
a. The term investments refers to the process of identifying, evaluating, selecting, and monitoring the
placement of funds with a view toward preserving or increasing value and/or earning a positive return.
Judd has simply identified one investment (stock). He will not know how to evaluate, select or
monitor other investments nor will he know how to adjust his investments in appropriate ways at
various stages in the life cycle without a course in investing. In addition to looking at his own
investments, a course in investing will give Judd a new perspective on the role of investments in the
economy. He will learn that as an investor, he is actually supplying funds to government and business,
which will enable the continued strength and growth of the general economy.
b. Clearly, Judd has ignored short-term securities, bonds, options, commodities and financial futures,
mutual funds, real estate, tangibles, tax shelters, and limited partnerships. Each one of these choices
offers another risk-reward relationship that may meet certain unique investment requirements that
cannot be met by common stock alone.
c. Judd does not have the knowledge needed to carry out the investment process described in Question a.
Knowing about common stocks is not the same as understanding investments, and it is not necessarily
true that common stock is the best investment available to Judd. Besides, the investment decision has
to be compatible with his goals and risk preferences. Individual stocks are far riskier than, say an
investment in CDs or even mutual funds that invest in a well-diversified portfolio of stocks.
There are other considerations, too. Does Judd have plans for the future when he will need the money?
If so, is it a short-term or a long-term need? Answers to these questions will help determine whether
he should make short-term or long-term investments. In summary, to gain an understanding of the
investment decision and management process, Judd should pass up the golf course in favor of the
investments course.
Case 1.2 Preparing Carolyn Bowen’s Investment Plan

This case allows students to evaluate a proposed investment plan aimed at achieving certain retirement
goals.
a. The amount currently available to Carolyn includes $60,000 from the proceeds of the life insurance
and $37,500 from her savings account, or a total of $97,500. At 6% compounded annually, her money
will be worth:
If she retires at age 62 (seven-year investment):

$97,500  (1.06)7 = $146,604
(You can find this in Excel by typing the formula =fv(0.06,7,0,−97500).)
Add $112,500 from the sale of her home, and Carolyn will have $259,104.
If she retires at age 65 (10-year investment):

$97,500  (1.06)10 = $174,608

(You can find this in Excel by typing the formula =fv(0.06,10,0,−97500).)
Add $127,500 from the sale of her home, and Carolyn will have $302,108.
b. Value of Carolyn’s assets at 62 = Value of savings account + Value of house:

$146,604 + $112,500 = $259,104
Similarly, value of assets at 65 = $174,608 + $127,500 = $302,108.
Because Carolyn receives $79 for each $1,000 that she invests in the annuity, we can calculate her
annual income starting at age 62 as follows:
($259,104/$1,000)  $79 = $20,469
Similarly, if Carolyn’s assets at age 65 are $302,108, and if for each $1,000 that she invests in the
annuity she will receive $89.94 in income, her income starting at age 65 would be:
($302,108/$1,000)  $89.94 = $27,172
c.
Annual Retirement Income
Age 62 Retirement Age 65 Retirement
Annual Social Security & Pension
Fund Benefits $16,308 $20,256
+ Annuity Income 20,469 27,172
Total Annual Retirement Income $36,777 $47,428
d. Carolyn needs $45,000 per year (before taxes) of retirement income. Without considering the change
in her tax status upon retirement, she will not satisfy this goal if she retires at age 62. At age 65, she
meets her requirement. The nature of tax legislation and the reduction in Carolyn’s tax liability upon
retirement may make retirement at age 65 viable.
e. Carolyn’s plan is extremely conservative and low risk. The returns from the plan are very secure and
probably assured. Carolyn can be confident that the accumulated worth of her investments will be
available to her at retirement. Her plan to retire at age 65 meets her retirement-income goal. Carolyn’s
plan offers low risk and low return. Through only a slight increase in risk, she might improve her
return on investment and have more “cushion” to allow for inflation and unexpected expenditures.
Carolyn could purchase highly rated bonds, CDs, and other blue chip security investments. In this
manner, her risk aversion would be satisfied, and she would earn a higher return on her investments.
This should permit more likely achievement of her retirement-income objectives. Therefore, with very
little increase in risk, Carolyn could invest her funds so as to increase the probability that she will
meet or surpass her requirement of an annual retirement income of $45,000.

Another random document with
no related content on Scribd:
"I ask you, brothers, what is their behaviour? In an open
letter Kaffirs are called up by them as at Derdepoort, and
women and children are murdered. The English assert that no
Kaffirs were utilized against us but only coloured people, but
it is a fact that Montsioa with his Kaffirs are in Mafeking,
and are employed to fight against us. Now, gentlemen, you must
not come to the conclusion that everyone who fights against us
belongs to the Beast (vide Revelations, chapter 13). There are
certainly hundreds of God's children with them who, however,
through fear are the Beast's, and are forced to act with them,
but God knows all hearts. We did not seek to spill the blood
which lies strewn upon the earth, as we conceded nearly all
our rights; but when they wanted to murder us, we could not
give way any more. How did it fare with Ahab? The mighty foe
came on to the walls of the city, and they lost heart. Then
the prophet of God came and said, Fear nothing. Then God
arose, and in that God we must put our trust, because He is
the same God. Let us not, therefore, live as if no God
existed; He reigns. In the beginning was the Word, and the
Word was God, and the Word became flesh and lived amongst us.
Look at history, it must be an example to us. He is still the
same God who led out Israel and hardened the heart of Pharaoh
to the end, until finally all the first-born of the Egyptians
died, whereupon Pharaoh allowed the Israelites to go. He is
still the same God who calmed the winds and storms on the sea,
and His arm is not shortened. Some ask, 'Does not this only
have reference to the Church in the two Republics?' No. See
the three youths in the burning oven. Did these rejoice alone?
No; but God's people of the whole earth. Was it solitary for
Daniel in the lions' den? No, but all Christians on the whole
earth rejoiced. So the Lord often chooses a small body to whom
He shows His miracles as an example for the whole Christian
world. Look upon the blood which has been spilt upon this
earth. Who is the cause of it? We have wanted peace and our
freedom since 1836, and the Lord has given it us, and will the
Lord ever give anything and then withdraw? No. But let us
humble ourselves before the Lord. There is no doubt about it
that eventually the Lord will lead us to victory. The day of
grace is not far from His people. Do not let us doubt but
remain true to God's word and fight in His name. When the cup
of humiliation is brought to our lips and we earnestly humble
ourselves before the Lord, then the day of grace has arrived.
Let each one then acknowledge that it is the hand of God which
makes us free and nothing else, then we shall not boast. Yet He
uses man as His instrument.
"I have laid my address before you, and I hope that the Raad
will not sit over it longer than to-morrow morning. There are
several members of the Raad who are burghers or military
officers in the field, so there will be no time to treat
ordinary subjects. I trust that you will only treat such
subjects as I lay before you. I have appointed an acting
Commandant General since I have lost my right-hand man,
although I do not infer that I have not more such men. The
late most noble Commandant General, Messrs. Kock and
Wolmarans, members of the executive council, are lost to me.
The State Secretary is a newly appointed one, and I am the
only one remaining of the old members of the executive
council, yet I have experienced much assistance and support
from the present members, and God will also support us. The
Lord is still our Commander-in-Chief; He gives orders and He
knows when to say, 'Thus far and no further.' It is surprising
how other Powers are unanimously with us and how the whole of
Europe prays for us, and will the Lord lend a deaf ear to
these prayers? Oh, no! Trust in the Lord and let us stand by
Him, and He will perform miracles. Even if I have to go to St.
Helena, the Lord will bring His people back and make them free,
and the same judgment will fall on the present Babylon, the
cause of all the spilt blood. We fight for the freedom which
God granted to us. I say again, should any brothers from this
Raad and private persons fall by the sword, they fought in the
name of the Lord and believed, and they, so says the word of
the Lord, are sacrificed on the altar for the glorification of
His name and of the glorious Church, which, at this time, is to
be revealed. The Church must be tried and purified, and that
is why I cannot see that this extraordinary war will be
allowed to destroy us. This war will be continued until the
Lord says, 'Thus far and no further,' remain at that, abide by
that, and fight with me. I give myself in the hands of the
Lord, whatever He has destined for me, I shall kiss His rod
with which He chastizes me because I am also guilty. Let
everyone humble himself before the Lord, I have said."
SOUTH AFRICA: Orange Free State: A. D. 1900 (May).

Annexation by proclamation of Lord Roberts to the
Dominions of the Queen.
"In view of Lord Robert's opinion that early annexation would

tend towards the pacification of the country, by removing a
feeling of uncertainty as to the return of President Steyn's
government," the following commission by the Queen to Lord
Roberts was issued on the 21st of May:
"Victoria R. I., by the Grace of God of the United Kingdom of

Great Britain and Ireland Queen, Defender of the Faith,
Empress of India: To Our Right Trusty and Well-beloved
Councillor Frederick Sleigh, Baron Roberts of Kandahar, Field
Marshal of Our Forces, Knight of Our Most Illustrious Order of
Saint Patrick, Knight Grand Cross of Our Most Honourable Order
of the Bath, Knight Grand Commander of Our Most Exalted Order
of the Star of India, Knight Grand Commander of Our Most
Eminent Order of the Indian Empire, upon whom We have
conferred the Decoration of the Victoria Cross. Greeting:
Whereas the territories in South Africa heretofore known as
the Orange Free State have been conquered by Our forces, And
whereas it is expedient that such territories should be
annexed to and should henceforth form part of Our Dominions:
Now know you that We, reposing especial trust and confidence
in you the said Frederick Sleigh, Baron Roberts of Kandahar,
do hereby authorize and empower you in Our name to annex the
said territories and to declare that the said territories
shall henceforth form part of Our Dominions.
{502}
And We do hereby constitute and appoint you to be thereupon
Administrator of the said territories provisionally and until
Our pleasure is more fully known. And We do authorize and
empower you as such Administrator to take all such measures,
and to make and enforce such laws as you may deem necessary
for the peace, order, and good government of the said
territories. And we do strictly charge and command all Our
officers, civil and military, and all other Our faithful
subjects, that in their several places, and according to their
respective opportunities, they do aid and assist you in the
execution of this Our Commission, and for so doing this shall
be your Warrant. Given at Our Court at St. James's, this 21st
day of May, One thousand nine hundred, in the Sixty-third Year
of Our Reign." The commission was executed by a public reading
of the proclamation of Lord Roberts at Bloemfontein on the
24th of May.
Great Britain, Papers by Command: 1900,

Cd. 261, pages 136, 144.
A counter-proclamation, referring to that of the British

commander, was issued by President Steyn, from Reitz, on the
11th of June, declaring: "Whereas an unjust war was forced on
the people of the Orange Free State and of the South African
Republic by Great Britain in the month of October 1899, and
whereas these two small Republics have maintained the unequal
struggle with the powerful British Empire for more than eight
months and still maintain it; … Whereas the forces of the
Orange Free State are still in the field and the Orange Free
State has not been conquered and whereas the aforesaid
proclamation is thus in contradiction with International Law;
Whereas the independence of the Orange Free State has been
acknowledged by nearly all the civilised Powers; Whereas it is
notorious that the British authorities have lately recognised
that the Orange Free State is governed in an exemplary manner,
and that it is both a violation of the laws of civilization
and a denial of the fundamental rights of such people to rob
it on what a pretence soever, of its freedom, and whereas I
consider it desirable to make known to all whom it may concern
that the aforesaid Proclamation is not recognised by the
Government and the people of the Orange Free State; So,
therefore, I, M. T. Steyn, State President of the Orange Free
State, in consultation with the Executive Council, and in the
name of the independent people of the Orange Free State, do
hereby proclaim that the aforesaid annexation is not
recognised and is hereby declared to be null and of no avail.
The people of the Orange Free State is and remains a free and
independent people, and refuses to submit to British rule."
Great Britain, Papers by Command:

Cd. 261, 1900, page 155.
SOUTH AFRICA: Cape Colony: A. D. 1900 (May).

Opposition of Cape Colony Afrikanders to the annexation
of the Republics.
A "People's Congress" of the Afrikanders, or Bondmen, of Cape

Colony, was held at Graaff-Reinet, on the 30th of May, to
protest against the annexation of the Boer Republics. The
following resolution was adopted by acclamation: "Whereas,
were the Republics to be annexed the majority of Cape
Colonists would feel themselves bound morally to work
unceasingly by every right and lawful means for the
restoration of independence to the Republics, and to make that
end their first political object; And whereas from our
knowledge of the history and character of the Republics we are
convinced they would never become the willing subjects of the
Empire, but would seize any and every opportunity which might
offer itself to recover their independence, possibly by force
of arms, once they were to be deprived of it; And whereas
instead of the annexation of the Republics tending to promote
the welfare of their people, as has been claimed, it would, if
successfully maintained for any long period, tend to degrade
those people and their offsprings, seeing that the servitude
of a self-governing State is as demoralising to its people as
the more direct form of personal slavery; And whereas, as the
annexation of the Republics by Great Britain would be as great
a wrong morally as the theft by a rich man of a poor man's
hard-earned savings; On that general ground alone it is not
believable that permanent good could result from such a
policy. Therefore be it resolved now that we, on behalf of the
majority of Cape Colonists, do hereby declare our solemn and
profound conviction that the annexation of the two South
African Republics would be disastrous to the peace and welfare
of South Africa and of the Empire as a whole." Also the
following: "Be it resolved that it is the opinion of the
people in Congress here assembled that a settlement of the
South African question on the following basis would prove a
blessing to South Africa and the Empire, namely, that the two
Republics should have their unqualified independence; that the
Colonies should have the right to enter into treaties of
obligatory arbitration with the Republics for the settlement
of all disputes affecting the internal affairs of the South
African Continent, and that this colony, and any other colony
so deserving it, should have a voice in the selection of its
Governors. Be it further resolved that a settlement on the
above basis would make the majority of the people who have
made South Africa their home the warm friends and staunch
allies of the British Empire, and that in no other way known
to us can that end now be attained."
In transmitting a report of this meeting to Secretary

Chamberlain, the High Commissioner, Sir Alfred Milner, wrote:
"I do not myself take a very gloomy view of the prospect of
racial relations in the Colony, much less in South Africa
generally. If it is true, as the conciliators are never tired
of threatening us, that race hatred will be eternal, why
should they make such furious efforts to keep it up at the
present moment? The very vehemence of their declarations that
the Africanders will never forgive, nor forget, nor acquiesce,
seems to me to indicate a considerable and well-justified
anxiety on their part lest these terrible things should after
all happen."

July, 1900, South Africa, Cd. 261, pages 182-188.
{503}
SOUTH AFRICA: The Field of War: A. D. 1900 (May-June).

The British invasion of the Transvaal.
Occupation of Johannesburg and Pretoria.
Expulsion of the Boers from Natal.
Discussion of terms of surrender.
On the 22d of May, Lord Roberts resumed his forward movement

from Kroonstad, with a strong column of cavalry, under General
French, in advance on the west, and another, of mounted
infantry, under General Ian Hamilton, on the east. The Boers,
under General Botha, had prepared defensive works on the
Rhenoster River, but were too much endangered by the flanking
column of General Hamilton to make a stand there, and fell
back. Again at the Vaal River, their fortifications were
untenable, as against an invasion of such numbers, with so
large a mounted force. With little resistance the British army
crossed the Vaal on the 26th and 27th and entered the
territory of the South African Republic. On the 30th it was
before Johannesburg, and the town was surrendered on the
following day. Thence the invading force moved upon Pretoria,
meeting some opposition, but evidently none that was hopefully
made, and the capital was surrendered unconditionally to Lord
Roberts on the 5th of June. President Kruger and the officials
of his government had left the town, with their archives and
their treasure, and movable offices had been prepared for them
in railway cars, which were transferred for the time being to
Machadodorp, at some distance eastward. Most of the armed
burghers had escaped from the town, and they had been able to
remove about 900 of their British prisoners; but a large
number of the latter were set free. General Botha gathered up
his broken and discouraged forces and intrenched them in a
strong position on the Lorenzo Marquez railway, only 15 miles
eastward from Pretoria. Lord Roberts moved against him on the
11th and compelled him to retreat, after hard fighting for
five hours. This ended important operations in that part of
the field.
In Natal, General Buller, since early in May, had been pushing

his army northward, in a movement co-operative with that of
Lord Roberts. He had turned the flank of the Boer forces in
the positions they had fortified against his advance, regained
Glencoe and Dundee, and moved on to Newcastle. Then, with more
serious fighting, he forced Botha's Pass through the
mountains, compelled the Boers to evacuate their strongholds
on Laing's Nek and Majuba Hill, and was substantially in
possession of Natal.
On the 30th of May, General Buller sent word to General Chris

Botha that Lord Roberts had crossed the Vaal, and suggested
surrender, further resistance appearing useless. This led to a
meeting of the opposed commanders, at which Botha asked what
terms Lord Roberts would offer. Buller immediately referred
the question to Lord Roberts, saying: "Can you let me know
your terms of peace for individual and separate commandos? … I
think they are inclined to give in, and that I have in front
of me about half the Transvaal forces now in the field. If you
think it worth while please let me know if I may mention any
terms of peace to them. I think, even if assisted from the
Orange Free State, it will cost me about 500 men killed and
wounded to get out of Natal." The reply of Lord Roberts, dated
June 3, 1900, was as follows: "Your telegram of yesterday. My
terms with the Transvaal Government are unconditional
surrender. With regard to troops, those who deliver up their
arms and riding animals are allowed to go to their homes on
signing pledge that they will not fight again during present
war. The exceptions to this rule are those who have commanded
portions of the Republican forces, or who have taken an active
part in the policy which brought about the war, or who have
been guilty of or been parties to wanton destruction of
property, or guilty of acts contrary to the usages of
civilized warfare. Principal officers should remain with you
on parole until you receive instructions regarding their
disposal." General Botha declined the terms.
Nine days later (June 12) Lord Roberts opened correspondence

on the same subject with General Louis Botha, Acting
Commandant-General of the Boer forces, endeavoring to persuade
him, "in the cause of humanity, to refrain from further
resistance." The Commandant-General wrote in return: "For the
purpose of arriving at a decision, it is not only absolutely
necessary for me to call a General Council of War of my
Officers and to consult them, but above all it is necessary
for me to consider the subject with my Government. I trust
that for the sake of humanity your Excellency will give me the
opportunity for such consideration and consultation. As some
of my Officers are near the Natal Border, and I am also a long
way separate from my Government, this will require some time.
I ask your Excellency kindly, therefore, for an armistice for
six days, beginning from to-morrow morning at sunrise, during
which time no forward movement will be made on either side
within the territory of the South African Republic."
Lord Roberts replied: "I am anxious to meet your wishes and to

enable your Honour to communicate with the Government of the
South African Republic, but as the movement of my troops in
that Republic are intimately connected with operations in
progress in other parts of South Africa, it is impossible for
me to accede to your Honour's request that there should be an
armistice for 6 days, during which time no forward movement
will be made on either side within the territory of the South
African Republic. I am willing, however, to refrain from
making further movements in the district to the east of the
Elands River Railway Station, our present most advanced post
in that direction, and also in the district north of the
Volksrust and Johannesburg Railway, for a period of five (5)
days, commencing at dawn on the 15th June, on the condition
that no movement westward or southward is made by the Army of
the South African Republic during that same period. This will,
I trust, give your Honour the opportunity you desire of
consulting your Officers and conferring with your Government,
and I sincerely hope that the result will be of such a
satisfactory nature as to prevent further unnecessary loss of
life."
The proposal was declined by General Botha, in the following

note (June 15): "In answer to your letter, dated 14th June,
just received by me, wherein your Excellency consents to an
armistice for five days, but with the reservation of the right
to your Excellency to move your Army in all directions within
the South African Republic, except cast of Elands River
Station and north of the Volksrust-Johannesburg Railway line,
I must, to my great regret, inform your Excellency that this
reservation makes it impossible for me to accept this
armistice, which I have so much desired."
{504}
SOUTH AFRICA: The Field of War: A. D. 1900 (June-December).

Continued resistance of the Boers in guerilla warfare.
An outline of the events of seven months.
A British view of the later situation.
"After the occupation of Pretoria, exhaustion of the mounted

forces and of the transport again supervened and Lord Roberts
was preoccupied with the double task of bringing up large
numbers of horses and masses of stores by a railway exposed to
attack along a distance of 290 miles, and at the same time of
dealing, as best he could, with scattered bodies of the enemy,
nowhere formidable in a military sense, but capable of much
mischief. The period beginning with the occupation of
Bloemfontein, during which the Boers developed and maintained
warfare of guerilla type, imposed highly responsible duties
upon British officers in charge of scattered posts and
convoys. In some cases those duties were not adequately
discharged, and for a time the defences of the important line
of communications appeared to be somewhat imperfectly
organized and supervised. There were signs of the tendency to
relax precautions after a conspicuous success, which has been
shown by British armies on other occasions. It was clear that
the main centre of Boer activity was in the Bethlehem
district, and at the end of June Lord Roberts despatched a
strong column south under Lieutenant-General Hunter to
co-operate with Major-Generals MacDonald, Clements, and Paget
from the west. Bethlehem was captured on July 7, and by the
end of the month Commandant Prinsloo, caught in the Brandwater
Basin between the forces of Lieutenant-Generals Hunter and
Rundle, surrendered with more than 4,000 men and a large
number of horses and wagons. … Meanwhile, Lord Roberts, who
had driven back the Boers along the Lorenzo Marques line, in
two actions near Eerste Fabrieken, on June 11 and 12, began an
advance eastward on July 23, and on August 7 Sir R. Buller
moved northwards from Paarde Kop. On August 25 the
Commander-in-Chief met Sir R. Buller and Generals French and
Pole-Carew at Belfast, and after the fighting of the 27th the
resistance of the Boers in this district practically
collapsed. Starting from Machadodorp on September 1, Sir R.
Buller moved slowly towards Spitzkop, driving the enemy before
him through a difficult mountainous region, and General French
pressed on to Barberton, which was occupied on the 13th
without opposition. On the 24th the Guards reached Komati
Poort. The rugged hill country east of Belfast offered great
opportunities for the tactics in which the Boers appeared to
excel; but the 'natural fortress surrounded by a glacis of
about 1,500 yards absolutely without cover' near Bergendal
Farm was not defended with the tenacity shown on previous
occasions, and the subsequent British advance led to a
wholesale destruction of artillery material and to the
surrender of some 3,000 men to the Portuguese. This, the third
great disaster which has befallen the Boers, left them without
any centre of resistance or any considerable gathering of
fighting men.
"Before the outbreak of war we estimated their available

strength at about 45,000, to which must be added some 10,000
colonial rebels and perhaps 5,000 mercenaries. It is doubtful
whether the force actually in the field at any one time
reached 45,000, and the total loss in killed, wounded and
prisoners, cannot be much less than 30,000. … Exhaustion of
supplies and of ammunition must soon begin to tell heavily
upon the Boers; but it cannot be said that they have at
present given evidence of personal demoralization.
Comparatively small bodies, lightly equipped, still hold the
field and show much activity over a wide area. It is
impossible to provide British garrisons for every town and
village, and wherever the roving bands of the enemy appear
there is a recrudescence of local hostility, even in districts
which have been apparently tranquil for months. Large mobile
columns are employed in pursuit, but the Boers carefully avoid
general engagements and attack only when there appears to be a
chance of surprising and overpowering small detachments. …
Mounted forces, marching as light as possible and capably
commanded, are the principal requirements of the situation. It
is necessary to give the roving commandos no rest and to make
every effort to capture their leaders. The work is not easy,
and it requires great energy and sound military judgment; but
it will be successfully accomplished, and the scale of the
operations will steadily dwindle into measures of police.
Meanwhile a gradual withdrawal of troops from South Africa is
taking place, and progress is doubtless being made with the
new organization under Lieutenant-General Baden-Powell, which
will be specially fitted for the work that now lies before us.
…
"The total casualties of the war up to the 31st ult. are
estimated at about 46,000, and 'the reduction of the military
forces' due to a campaign of more than a year is returned at
12,769, of which total 11,739 are accounted for by death,
including 6,482 victims to disease. It is impossible to rank
the Boer war among the great campaigns of the British Army;
but the peculiar difficulties must never be forgotten. The
closest parallel is probably that of the American Civil war,
in which an armed people long resisted far superior forces and
carried invasion into the territory of the stronger Power. The
military potentiality of the Southern States was at first as
little realized in Washington as was that of the Boers in
London, and disasters therefore resulted. In both cases the
issue was certain as soon as adequate force in strong hands
was available. The Southern leaders, like the Boers, hoped and
strove for foreign intervention in vain; but the former were
far less prepared for war than the latter. On the other hand
the Boers, though ably led in a limited sense, have produced
no commanders with a genius for war comparable to that of Lee
and of Jackson, nor have they shown the discipline and the
cohesion which characterized the Southern armies when at their
best. Desultory and irregular warfare may still be prolonged
for a time; great activity and ample vigilance will still be
required."
London Times,
November 5, 1900.
At the end of the year the "Times" summed up the later

features of the situation as follows: "The spirit of the Boers
remained unbroken, and small mobile commandos, scattered over
the vast area of the countries which we had undertaken to
occupy, perfectly familiar with the ground, and in close touch
with the civil population, have succeeded up to the present
time in making the task of the British Generals one of extreme
difficulty. The Boer resistance has centered chiefly in three
men, Commandants Louis Botha in the northeast, Delarey to the
west of Pretoria, and De Wet in the Orange Free State. The
first, who since the death of General Joubert, was in chief
command in Natal, and afterwards in the Eastern Transvaal, has
not been conspicuously active since September, but the other two
have achieved a great deal with their very limited resources,
and have earned enduring fame as guerrilla
chieftains.
{505}
De Wet, especially, after having been 'routed' and
'surrounded' times without number, has succeeded in giving
occupation to several British Generals and their forces up to
the present time, has kept the eastern part of the Orange
Colony in a continual ferment, and till now has defied the
energetic efforts of General Charles Knox to capture him.
Delarey, after remaining fairly quiescent for several weeks,
suddenly advanced through the Magaliesburg in the middle of
the present month with a force variously estimated at 1,500 or
3,000 men, surrounded and captured a position held by four
companies of the Northumberlands, and compelled the retreat of
General Clements and the evacuation of his camp. It is true
that these things are but the episodes of the later stages of
a war in which there will be no more great battles, but they
are exhausting, costly, and sometimes humiliating."
London Times,
December 31, 1900.
SOUTH AFRICA: The Field of War: A. D. 1900 (August-December).

Farm-burning by the British troops.
Under proclamations issued by Lord Roberts in August and

September, aimed at the suppression of irregular warfare, a
punitive policy was adopted, which included the burning of
farmhouses where guerrilla bands were sheltered, or whose
inmates acted with such bands, and which soon came to be
denounced as one of shameful barbarity. Such different
representations have been made, as to the manner in which the
orders of Lord Roberts were carried out, and as to the measure
of devastation and suffering produced, that it seems to be
impossible to judge whether the British farm-burning in the
Transvaal and Orange Free State has or has not gone beyond the
usual brutalities that belong to the very nature of war. Mr.
Kruger, in speeches made after he went to Europe, represented
it as monstrous beyond example. "The war waged against us," he
said, on landing at Marseilles, "is a war of barbarians. I
have witnessed wars of barbarians and never have I seen
committed barbarities so monstrous as those committed daily
among us. Our farms, which we had had so much difficulty to
construct, are burned. The women whose husbands are at the war
are hunted down and brutally separated from their children,
who are deprived of bread and necessaries." The Afrikanders of
Cape Colony held similar language. Men of conscience and heart
in England were troubled by such accusations. Mr. Trevelyan, M.
P., wrote to "The Times," on the 24th of November: "What so
many of us feel, in the first place, is that we are not in a
position to form a fair judgment from sheer lack of the most
elementary reliable information of what has been done and is
still doing. An officer returned from the war about two months
told me the other day that he supposed only about 40 farms had
been burnt. I read in the 'Westminster Gazette' from an
equally honourable gentleman that it would not be an
exaggeration to say that one-third of the farms in the Orange
River Colony were in ashes. Clearly it is impossible for the
nation to make out the truth when such contradictory
statements are universally current. … One thing we do know for
certain—that on September 2 Lord Roberts, regarding the war as
having degenerated into guerrilla fighting, proclaimed that
all farms would be burnt within a radius of ten miles of any
point upon the railway raided by the Boers. It is now November
24. We know that many people innocent of any dealing with De
Wet have lost all they possess owing to his misguided energy.
Has it diminished sensibly the Boer forces in the field? If
not, what is its utility? … If the resistance of the Boers is
being lessened by these destructions, let us at least have the
poor consolation of knowing it. Again, we want to know what
really happens to the women and children whom our soldiers
conduct, I believe, generally to the nearest town after their
homes have been burned. People whose property has been totally
destroyed in a country where war has stopped all industry
obviously cannot keep themselves."
When Parliament met in December the subject was brought up

there, by Mr. Trevelyan and others, and debated at length,
without much clearer light on it being found. The government
could give no definite information as to what was being done,
but stoutly upheld the course which the military leaders had
taken. Mr. Balfour said: "The ordinary laws of war as
practised by civilized countries depend essentially upon
drawing a sharp distinction between combatant and
non-combatant. The combatant has his particular privileges,
the non-combatant has his particular privileges. What has been
universally found intolerable is that a man should oscillate,
according to his convenience, from one category to the
other—be a peaceful agriculturist when it suits him and an
effective combatant when circumstances seem to be favourable.
That practice is so intolerable that I believe all nations
have laid down the severest rules for repressing it. I have in
my hands the instructions to the army of the United States in
the field, dated 1898. I should like to read to the House two
extracts from this document. Rule 52 says:— 'If a people of a
country, or any portion of same already occupied by the army,
rises against it, they are violators of the laws of war, and
are not entitled to their protection.' The 82nd rule is to the
effect that men, or squads of men, who take part in raids of
any kind without permission, and without being part or portion
of an organized hostile army, are not public enemies, and
therefore if captured are not entitled to be treated as
prisoners of war, but shall be treated as highway robbers or
pirates."
Mr. Chamberlain said: "Lord Roberts's proclamation was to the
effect that, in the first instance, general officers were
authorized to burn down farmhouses as a punishment in cases in
which they were used as fortified places or places for the
concealment of arms, or in which the white flag had been
improperly used, or where they had been the scenes of gross
treachery and of acts contrary to the laws of war. As a matter
of right and morality, the Government are prepared to sustain
Lord Roberts absolutely. … Lord Roberts was placed in the most
difficult position in which a general could possibly be
placed. He had his base 1,500 miles away at least from his
front, through a most difficult country, and he was served
only by a single line of railway, and any catastrophe to the
railway might have meant a catastrophe to the whole army. It
is all very well to talk of humanity, but you must take first
account of our own people.
{506}
Now, Sir, it was of the first importance, it was the clear
duty of Lord Roberts, to take any steps in his power to
prevent the cutting of the line and the danger which would
thereby accrue to his force, and he accordingly issued a
proclamation that in the case of the destruction of the line
persons in the vicinity would be held responsible, and that
farmhouses in the vicinity might be destroyed. We understood
his proclamation to mean that he would require evidence of
some complicity on the part of the persons whose farmhouses
were destroyed. … We inquired the other day, when the matter
assumed greater importance, whether the construction we
placed upon the proclamation was true, and we have a reply
from Lord Kitchener, who has now taken the place of Lord
Roberts, that we are perfectly right in that assumption. …
According to the proclamation of Lord Roberts, whose humanity
is proverbial, and who therefore could not under any
circumstances be accused of unnecessary cruelty, cattle are
always to be paid for by the troops, or a receipt given,
which is as good as payment, except in those cases in which
the owner of the cattle has been guilty of acts of war or of
outrages which are punishable by all civilized nations who
are at war. Therefore the taking of cattle does not mean
necessarily that the owner of the cattle is placed in the
impossibility of continuing his occupation. If he has not got
the cattle he has got the money for them except in the cases
in which destruction has taken place as a punitive measure.
In all other cases the instructions are precise, and I
believe from all the information we have obtained from the
reports of the generals in the field they have been strictly
carried out. Never in the history of war has war been carried
out with so much humanity on the part of the officers and of
the soldiers concerned as in the present war. The honourable
member also spoke of the deportation of women. That sounds
like something serious, but I believe it will be found that
it is only for their own protection. If we are unable in this
vast country to occupy and garrison every bit of it, when our
troops are removed, if women and children are left alone they
remain there in some danger—in danger from those marauding
bands of which I have spoken and also from the vast native
population. And, Sir, this native population is answerable, I
believe, for every case of proved outrage either upon women
or children. I believe, and the last reports we have received
confirm that belief, that in no case has a British soldier
been justly accused of such an outrage."
The following proclamation, issued by Lord Roberts, November

18, seems to indicate that there had been practices in
farm-burning, before that time, which he could not approve:
"As there appears to be some misunderstanding with reference
to burning of farms and breaking of dams, Commander-in-Chief
wishes following to be lines on which General Officers
Commanding are to act:—No farm is to be burnt except for act
of treachery, or when troops have been fired on from premises,
or as punishment for breaking of telegraph or railway line, or
when they have been used as bases of operations for raids, and
then only with direct consent of General Officer Commanding,
which is to be given in writing, the mere fact of a burgher
being absent on commando is on no account to be used as reason
for burning the house. All cattle, wagons, and foodstuffs are
to be removed from all farms; if that is found to be
impossible, they are to be destroyed, whether owner be present
or not."

Cd. 426, 1900, page 23.
SOUTH AFRICA: Rhodesia: A. D. 1900 (September).

Protectorate over Barotsiland.
The "Cape Times" of September 19, 1900, stated that a

"Government Gazette Extraordinary" had been issued containing
an Order in Council proclaiming a protectorate over
Barotsiland—North-Western Rhodesia. "The limits of the country
included in the protectorate are the parts of Africa bounded
by the River Zambesi, the German South-West African
Protectorate, the Portuguese possessions, the Congo Free
State, and the Kafukwe or Loengi River. The Order provides
that the British South Africa Company may nominate officials
to govern the territory, and that these are to be confirmed by
the High Commissioner. The High Commissioner may, amongst
other things, from time to time by proclamation provide for
the administration of justice, the raising of revenue by the
imposition of taxes (which may include a tax in respect of the
occupation of native huts), and Customs duties or otherwise,
and generally for the peace, order, and good government of all
persons within the limits of the order, including the
prohibition and punishment of acts tending to disturb the
public peace. The expenses of the administration of this
country, if not entirely borne by the revenues of the country,
will be borne by the British South Africa Company, and if the
revenue more than meet the expenses, the excess will be paid
to the Chartered Company."
SOUTH AFRICA: The Transvaal: A. D. 1900 (September).

Leave of absence to President Kruger.
His departure for Europe.
Proclamation of Lord Roberts.
The following proclamation by the Executive Council of the

Boer government was issued from Nelspruit on the 10th of
September, 1900: "Whereas the advanced age of His Honour the
State President makes it impossible for His Honour further to
accompany the Commandos; and whereas the Executive Council is
convinced that the highly-valued services of His Honour can
still be usefully applied in the interest of Land and People,
the Executive Council hereby determines to grant His Honour
leave of absence to Europe for the period of six months, in
order still to advance our cause there, and Mr. S. W. Burger,
Vice-President, takes his place according to law.
[Signed] S. W. BURGER, Vice President.
F. W. REITZ, State Secretary."
Lord Roberts seems to have regarded the acceptance of this

"leave of absence" by President Kruger as equivalent to a
resignation of his office; for he published, on the 14th of
September, a proclamation in the following words:
"The late President, Mr. Kruger, and Mr. Reitz, with the
archives of the South African Republic, have crossed the
Portuguese frontier, and arrived at Lourenço Marques with a
view to sailing for Europe at an early date. Mr. Kruger has
formally resigned the position he held as President of the
South African Republic, thus severing his official connection
with the Transvaal. Mr. Kruger's action shows how hopeless in
his opinion is the war which has now been carried on for
nearly a year, and his desertion of the Boer cause should make
it clear to his fellow burghers that it is useless for them to
continue the struggle any longer.
{507}

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Solution Manual for Fundamentals of Investing 13th Edition by

Smart ISBN 013408330X 9780134083308

II. Types of Investments

III. Making Your Investment Plan

IV. Meeting Liquidity Needs with Short-Term Investments

©2017 Pearson Education, Inc.

2. Review the factors used to differentiate between different types of investments

3. The importance of and basic steps involved in the investment process

5. Derivative securities such as options and futures

7. Writing an investment plan

8. Building a diversified portfolio consistent with investment goals

10. Developing an investment program that considers differing economic environments

11. The use of short-term securities in meeting liquidity needs

©2017 Pearson Education, Inc.

3. The key participants in the investment process—government, business, and individuals—are

◼ Answers to Concepts in Review

©2017 Pearson Education, Inc.

©2017 Pearson Education, Inc.

©2017 Pearson Education, Inc.

©2017 Pearson Education, Inc.

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◼ Suggested Answers to Discussion Questions

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Minimum Federal Method and Ease of

©2017 Pearson Education, Inc.

Minimum Federal Method and Ease of

1.3 a. $50,000/$50 = 1,000 shares of stock.

©2017 Pearson Education, Inc.

©2017 Pearson Education, Inc.

◼ Solutions to Case Problems

Case 1.2 Preparing Carolyn Bowen’s Investment Plan

If she retires at age 62 (seven-year investment):

If she retires at age 65 (10-year investment):

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$97,500  (1.06)10 = $174,608

b. Value of Carolyn’s assets at 62 = Value of savings account + Value of house:

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SOUTH AFRICA: Orange Free State: A. D. 1900 (May).

"In view of Lord Robert's opinion that early annexation would

"Victoria R. I., by the Grace of God of the United Kingdom of

Great Britain, Papers by Command: 1900,

A counter-proclamation, referring to that of the British

Great Britain, Papers by Command:

SOUTH AFRICA: Cape Colony: A. D. 1900 (May).

A "People's Congress" of the Afrikanders, or Bondmen, of Cape

In transmitting a report of this meeting to Secretary

Great Britain, Papers by Command:

SOUTH AFRICA: The Field of War: A. D. 1900 (May-June).

On the 22d of May, Lord Roberts resumed his forward movement

In Natal, General Buller, since early in May, had been pushing

On the 30th of May, General Buller sent word to General Chris

Nine days later (June 12) Lord Roberts opened correspondence

Lord Roberts replied: "I am anxious to meet your wishes and to

The proposal was declined by General Botha, in the following

SOUTH AFRICA: The Field of War: A. D. 1900 (June-December).

"After the occupation of Pretoria, exhaustion of the mounted

"Before the outbreak of war we estimated their available

At the end of the year the "Times" summed up the later

SOUTH AFRICA: The Field of War: A. D. 1900 (August-December).

Under proclamations issued by Lord Roberts in August and

When Parliament met in December the subject was brought up

The following proclamation, issued by Lord Roberts, November

Great Britain, Papers by Command: