Question: Assume that AT&Ts pension fund managers are considering two alternative securities as investments: (1) Security Z (for zero intermediate year cash flows), which costs $422.41

Assume that AT&T’s pension fund managers are considering two alternative securities as investments:

(1) Security Z (for zero intermediate year cash flows), which costs $422.41 today, pays nothing during its 10-year life, and then pays $1,000 at the end of 10 years,

(2) Security B, which has a cost today of $500 and pays $74.50 at the end of each of the next 10 years.

a. What is the rate of return on each security?

b. Assume that the interest rate that AT&T’s pension fund managers can earn on the fund’s money falls to 6 percent immediately after the securities are purchased and is expected to remain at that level for the next 10 years. What would the price of each security be after the change in interest rates?

c. Now assume that the interest rate rises to 12 percent (rather than falls to 6 percent) immediately after the securities are purchased. What would the price of each security be after the change in interest rates? Explain the results.

Step by Step Solution

★★★★★

3.36 Rating (162 Votes )

There are 3 Steps involved in it

1 Expert Approved Answer

Step: 1 Unlock

a Security Z Financial calculator solution enter N 10 PV 42241 PMT0 and FV 1000 compute IY 900 Secur... View full answer

Question Has Been Solved by an Expert!

Get step-by-step solutions from verified subject matter experts

Step: 2 Unlock

Step: 3 Unlock

Document Format (1 attachment)

352-B-C-F-F-D (519).docx

120 KBs Word File

Students Have Also Explored These Related Corporate Finance Questions!

What is the rate of return on invested capital? How is it calculated?

What is the rate of return on common equity? What are the three determinants of a companys rate of return on common equity? How do these three determinants affect the rate of return on common equity?

What is the rate of return on an investment of $10,606 if the company will receive $2,000 each year for the next 10 years?

Assume that AT&Ts pension fund managers are considering two alternative securities as investments: (1) Security Z (for zero intermediate year cash flows), which costs $422.41 today, pays nothing...

Sign MBL5903-2017-10-E-1 PAST EXA X + File C:/Users/daisy/Desktop/MBL5903/MBL5903-2017-10-E-1%20PAST%20E... Question 1 [14 marts) You plan to Invest in the Kish Hedge Fund, which has total capital of...

Need help with these discussion postings (in a document) and assignments (all in separate files), all directions are included as well. FINANCE DIRECTIONS Need to provide 1 original post substantial...

Need help with the attached questions from finance major Assignment 3 Questions 1. Anle Corporation has a current price of $27, is expected to pay a dividend of $2 in one year, and its expected price...

Please check the attached file to see if you can answer the problems FIN 305 Assignment 1 Due by 5pm Fri, Jan 27th The goal of this assignment is to help you understand certain situations in which...

(x 8) /x + x +1 Find dy/dx of the function y=: x 7x+5

On April 1, Renner Corporation purchased for $855,000 a tract of land on which was located aware house and office building. The following data were collected concerning the property: What are the...

The first hanshake in IPSEc is performed over unencrypted channel?

Identify What government agency deals with problems related to false advertising?

You can invest a windfall of $40,000 today at 4% compounded annually. You dont believe you can make another investment one year from now, but you believe that you can save enough that two years from...

Assume you win a lottery that will pay you $10,000 immediately, plus $20,000 one year from now, $30,000 two years from now, $40,000 three years from now, and $75,000 four years from now. Youre...

A $1 investment in a portfolio of small company stocks in 1928 would have grown to over ________ by mid-2019. a. $35,000 b. $8,000 c. $800 d. $80

Bambino Sporting Goods makes baseball gloves that are very popular in the spring and early summer season. Units sold are anticipated as follows: March 3,150 April 7,150 May 11,300 June 9,300 30,900...

A stock has a price of $ 4 4 . 3 5 and price - earnings ratio of 1 7 . 0 2 . What are the earnings per share?

Prepare an amortization schedule for a five-year loan of $67,000. The interest rate is 9 percent per year, and the loan calls for equal annual payments. (Do not round intermediate calculations and...