Question

Terry Zupita is considering how to invest the modest amount of money she recently inherited ($48,000). Based on her knowledge of different types of investments, as well as the advice of friends, Terry thinks that she should invest her inheritance in a long-term U.S. Treasury bond that promises to pay her $3,690 interest every 6 months for 10 years. However, today at lunch, Terry asked her best friend Mike how he would invest the money. Mike responded that he thought she could invest in something other than the T-bond and earn a much higher rate of return. In fact, he told Terry that he was at a company social a few nights ago where he overheard a few people talking about a U.S. automobile manufacturer that is partnering with the Chinese government to open a manufacturing operation in Shanghai. The firm, named Universal Autos (UA), would have exclusive rights to manufacture U.S. automobiles in China. One of the men involved in the conversation stated that he thought the arrangement presented a huge opportunity for UA to substantially increase its profits during the next 10 years, which should translate into significant increases in the company’s stock price. All of the other people involved in the discussion agreed. Intrigued, Terry thought it would be a good idea to investigate UA as a potential investment, so she sought advice from her friends and relatives. One friend advised against UA as an investment because she had heard from another friend that the company does not adhere to the same labor practices as companies do in the United States. Another friend advised against the investment because workers have no union representation, like those who work for automobile manufacturers in other countries. And, Terry’s uncle, who works in the U.S. State Department, said that he had heard that UA made a huge payment, which he called a bribe, to the Chinese government before the deal was signed. Her uncle thought that the payment UA made to the government might be considered illegal in the United States. However, Terry’s boyfriend, who happens to be Chinese, thinks that she should invest her money in UA. According to information provided by his family and friends in China, the agreement between UA and china represents a historic business deal that the Chinese government intends to support fully, so there is little risk associated with the investment. In fact, according to her boyfriend, Terry’s $48,000 could grow to $112,500 in 10 years if she invests it in UA. If you were Terry, what would you do? Should you invest in a company that might have questionable labor practices or pay bribes to foreign governments?

Answer 1

If i were Terry, i would invest the money inherited in US Treasury bond for following reasons

1. It will pay off in the long run to be invested in a safe investment product with capital safety. If we take the figures mentioned in this example, Terry inspite of taking the risk, will make less money by investing in UA when compared to her investment in US Treasury Bond.

2. Capital will be safe if the amount is invested in US Treasury bonds since they are back by the US Govt.

3. It always advisable to stay clear from companies involved in shady transactions, questionable labour practices and having poor corporate governance standards. In the long run it is always seen that such companies vanish leaving a lot of retail investors with heavy losses.