You are considering three investments.

The first is a bond that is selling in the market at $1,200.The bond has a $1,000 par value, pays interest semi-annually at 10%, and is scheduled to mature in 10 years.For bonds of this risk class you believe that a 12% rate of return should be required.

The second investment that you are analysing is a preference share ($100 par value) that sells for $95 and pays an annual dividend of $10.Your required rate of return for this share is 10%.

The last investment is an ordinary share ($35 par value) that recently paid a $5 dividend.The firm expect to have a 8% dividend growth during the next four year and 6% growth rate there in after. You think a reasonable required rate of return for the share is 13%.

Required:

(a)Calculate the value of each security based on your required rate of return.

(b)Calculate the expected return of each security.