Solution Manual for Fundamentals of Investing 13th Edition by Smart ISBN 013408330X 9780134083308
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I.
A.
1.
2.
3.
4.
5.
6.
B.
II.
3.
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
Key Terms
DiscussionQuestions
Problems
Case Problems
1.1 Investments or Golf?
1.2 Preparing Carolyn Bowen’s Investment Plan
Excel @Investing
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 programthat 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-terminterest 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.
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, aninvestment in oneshareof IBMstock directly provides thestockholder 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 areusually 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.
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.
a.
b. NOW account No legal minimum, but often set at
In person or through teller machines; very easy
up to $250,000 per account Unlimited checkwritingprivileges
c. Money market No legal Slightly above Yes, up to Limited checkdeposit account (MMDA) minimum, but often set at $2,500 passbook rates $250,000 per account writing privileges
d. Asset management Typically Similar to Yes, up to Limited checkaccount $5,000 to $20,000 MMDAs $250,000 in banks, varies elsewhere writing privileges
e. Series I savings bond Initial deposit is 50% of face value
f. U.S. Treasury bill $100
g. Certificate of deposit Tailored to investorneeds
At or near 0.00%inrecent years.
No, but federal government issue
Slightly above passbook and NOWaccounts No, but federal government issue
Slightly above asset management account No, but as secureas most bank savings and checking accounts
Penalty of three months interest for early withdrawal
Secondary market exists
Penaltyfor early withdrawal
h. Commercial paper $100,000 plus. Often included in MMMF portfolios Comparable to certificates of deposit No Very liquid
i. Banker’s acceptance Large denominations; not a typical retail investment
Comparable to certificates of deposit No
Active secondary market, but not open to individual investors except through funds
j. Money market No legal Slightly below No, but invests May take a few days mutual fund (money fund) minimum passbook savings account in government and bank issues to receive check from fund
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.
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.
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.
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 morelikely 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.
"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."
Great Britain, Papers by Command:
July, 1900, South Africa, Cd. 261, pages 182-188.
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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."
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.
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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.
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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."
Great Britain, Papers by Command: 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.