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What is the value of the treasury bond

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Reference no: EM132606429

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 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:

Question (a) What is the value of the Treasury bond?

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

Question (c) What is the value of the share?

Reference no: EM132606429

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