Question
You have a choice between the following three investments: A Treasury bond was issued 6 years ago and has 6 years to maturity. It has
You have a choice between the following three investments:
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.
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%.
X 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 10% p.a.
Required:
(a) What is the value of the Treasury bond?
b) What is the value of the zero-coupon bond?
c) What is the value of the share?
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started