Reference no: EM133032404

Question - You have a choice between the following three investments:

1- A zero-coupon corporate bond. The bond was issued 15 years ago and has 5 years to maturity. It has a face value of $105. Other bonds of a similar risk are trading at a yield of 7% p.a.

2 - An Australian Treasury bonds. The bond has a face value of $100, 7 years to maturity and a coupon rate of 4%. If an otherwise identical 7-year bond was issued today, it would have to have a coupon rate of 4.5%, compounding semi-annually.

3 - An ordinary share. The share is expected to pay an annual dividend of $6.5 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 3% in perpetuity. Your required rate of return on this share is 9%

F Limited's preference shares are selling for $4.50 in the market and pay a 50 cent dividend, also preference share investor has a required rate of return of 15% p.a.

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

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

(c) What is the value of the share?

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

(e) All four of these securities are currently selling for $150 each. You have $450 to spend. How many of each security would you buy? Briefly indicate why.