James Bond is approaching retirement in several months. Since his last visit with you, he has experienced the following changes in his life:

1) James is now married with a one-year old son

2) James has reconnected with his daughter in Japan and has been paying her ¥5 million per year for the past several years. He wants to set up a trust fund for her in the amount of ¥50 million

3) James wants to create an education fund for his son that would have $1 million when his son turns 18.

4) James wants to create a trust fund for his son upon college graduation in the amount of $2 million.

5) James and his wife have sold their homes and have used the proceeds to purchase the home in which they live in Idaho. The home and surrounding land is appraised at $4 million.

James has converted all his assets to US dollars and his pension from the British government will be direct-deposited into his US bank account and the pension income is now worth $80,000 per year until he dies. James estimates he will need an additional $220,000 per year for travel, home expenses, and health insurance.

James current portfolio allocation is shown below:

10% Cash with expected return of 3%

40% Investment Grade Bonds with expected return of 7%

20% International Government Bonds with expected return of 8%

30% International Equities with expected return of 13%

Use the following information: spot rate is ¥100/$ and the trust fund return is 5%.

A. Complete the return objective for James.

B. Determine the appropriate asset allocation using the classes from his current portfolio.

C. Select a bond that would fund the education fund for his son. Identify and describe the risks of using a bond to pay for a future liability.