QUESTION 3 You are considering three investments: Investment 1: Bond that is selling in the market at $1,200. The bond has a $1,000 par value, pays interest at 15 percent, and is scheduled to mature in 10 years. For bonds of this risk class, you believe that a 12 percent rate of return should be required. Investment 2: Preferred stock ($100 par value) that sells for $90 and pays an annual dividend of $15. Your required rate of return for this stock is 15 percent. Investment 3: Common stock ($35 par value) that recently paid a $4 dividend. The firms return on equity is 12.3%. The firms earning per share was $6.00 and it paid $3.20 in dividends per share. The stock is selling for $30, and you think a reasonable required rate of return for the stock is 18 percent.

b. Which investment(s) should you accept? Why?

c.What is the importance of valuation of bond and stock to the investor?