Question: (please show work I would like to learn how to do this- thanks!) It is April 2021. You are trying to decide which of the

(please show work I would like to learn how to do this- thanks!)

It is April 2021. You are trying to decide which of the following 4 securities to put into your investment portfolio:

a)a 10 year 1.5% coupon rate bond with a face value of 100 trading at a yield to maturity of 1.71%,

b)a 30 year 2.5% coupon rate bond with a face value of 100 trading at a yield to maturity of 2.35%,

c)a low growth stock paying annual dividends of $11 next year and growing at 2% per year forever being valued with a discount rate of 9.25%; and d)a high growth stock paying annual dividends of $16 next year and growing at 6% per year forever being valued with a discount rate of 10.5%.

You are concerned that the Fed is going to raise interest rates very soon in a way that is not fully expected by the market. You expect that the resulting Fed action will increase the discount rates of all of the above options by 1% (option 1 will trade at a yield to maturity of 2.71%, option 2 will trade at a yield to maturity of 3.35%, option 3 will be valued using a discount rate of 10.25% and option 4 will be valued using a discount rate of 11.5%). Which one of the four options will be affected the most by the change of interest rates on a percentage basis? Which one of the four options will be affected the least (in percentage terms)?

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