Jennifer's broker has shown her two options in the securities market for investment. Security one is a bond of par value of $1,000. The bond has a coupon interest rate of 11% paid annually maturing in seven years, with yield to maturity of 13%. these bonds are available in the market at the price of $890.
Security two is an ordinary stock and paid a $2.40 dividend in total for last year, which is expected to grow by 4% annually in the foreseeable future. the required rate of return on the stock is 11% per annul. these share are currently selling in the market at $40.
a. Determine the price of the two securities, which security should Jennifer choose and why?
b. How do you compare the investment in bonds to the investment in ordinary shares in term of risk and rewards?