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problem: To invest your yearend bonus, you are considering three investment opportunities, imaginatively named Security A, Security B, & Security C. Security A is expected to pay 100 dollar a year for the first five years, 400 dollar a year for the next ten years, & nothing after that. B is expected to pay $300 a year for the first eight years, 200 dollar a year for the next seven years, & nothing thereafter. Security C is expected to pay a growing amount every year forever. Starting next year, security C will pay 150 dollar & that amount will grow at a two percent per year. The expected return for the 3 investments is ten percent.

[A]   If all the 3 securities were traded on a market, determine their market prices?

[B]   If all the 3 securities are trading at the market prices find outd above, which investment do you prefer? describe your answer.

[C]  What will happen to the expected return if investors suddenly become less conservative & more willing to bear risk? What would happen to stock prices if this occurred? Could this be a reason for the 204 points rise in Dow yesterday? describe your answer.

Basic Finance, Finance

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