1. The interest rate for a 3 month CD at a bank is currently 4.20%.
The interest rate on the 3 month CD increases to 4.70%.
How many basis points did the interest rate increase?
0.50 basis points
50 basis points
500 basis points
0.50%
2. How do you estimate the cost of preferred stock?
Add 300 to 500 basis points to the long term treasury bond rate.
Use the expectations hypothesis of the term structure.
Treat the preferred stock like a perpetuity and then calculate its yield.
Add 300 to 500 basis points to the cost of debt.