Bond valuation
The Garraty Company has two bond issues outstanding. Both bonds pay $100 annual interest plus $1,000 at maturity. Bondf L has a maturity of 15 years, and Bond S a maturity of 1 year.
a. What will the value of each of these bonds when the going rate of interest is (1) 5 percent, (2) 8 percent, and (3) 12 percent? Assume that there is only one more interest payment to be made on Bond S.
b. Why does the longer-term (15 year) bond fluctuate more when interest rates change than does the shorter-term bond (1 year)?
Preferred stock evaluation
Fee Founders has preferred stock outstanding that pays a dividend of $5 at the end of each year. The preferred stock sells for $60 a share. What is the preferred stock's required rate of return?
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