You have a choice between the following three investments:

16. A zero-coupon corporate bond. The bond was issued 6years ago and has 6 years to maturity. It has a face value of $1500. Other bonds of a similar risk are trading at a yield of 8% p.a.

17. An Australian Treasury bonds. The bond has a face value of $1500, 10 years to maturity and a coupon rate of 6%. If an otherwise identical 10-year bond were issued today, it would have to have a coupon rate of 8%, compounding semi-annually.

18. An ordinary share. The share is expected to pay an annual dividend of $15 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 3.5% in perpetuity. Your required rate of return on this share is 10%.

19. R Limiteds 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 15% p.a.

Required:

(a) What is the value of the zero-coupon bond?

[Answer and show workings here] Use the formula sheet

(b) What is the value of the Treasury bond?

[Answer and show workings here] Use the formula sheet

(c) What is the value of the share?

[Answer and show workings here] Use the formula sheet

(d) What is the value of the preference share investor?

[Answer and show workings here] Use the formula sheet

(e) All four of these securities are currently selling for $500 each. You have $15000 to spend. How many of each security would you buy? Briefly indicate why.

[Answer and show workings here] Use the formula sheet

Vb = $ I (PVIFAi,n) + $ M (PVIFi,n)