• A Treasury bond was issued 6 years ago and has 6 years to maturity. It has a face value of $515. Other bonds of a similar risk are trading at a yield of 8% p.a.
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• A zero-coupon bond has a face value of $250, 7 years to maturity and a coupon rate of 14%. If an otherwise identical 7-year bond was issued today, it would have to have a coupon rate of 16%, compounding semi-annually.
• An ordinary share is expected to pay an annual dividend of $8.5 at the end of each of the next three years. After the third dividend is paid, the dividend is then expected to grow at a constant rate of 5% in perpetuity. Your required rate of return on this share is 25%.
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• X Limited’s preference shares are selling for $5.50 in the market and pay a 50-cent dividend, also preference share investor has a required rate of return of 10% p.a.

Required:

1. What is the value of the Treasury bond?  

What is the value of the zero-coupon bond?

What is the value of the share?         

What is the value of the preference share investor?

5. All four of these securities are currently selling for $200 each. You have $1000 to spend. How many of each security would you buy? Briefly indicate why.