You have a choice between the following three investments:
A bank bill. The bill was issued as a 90- day bank bill 35 days ago. It has a face value of $1000 and is currently trading at a yield of 5.75% p.a.
A coupon bond issued by a AA- rated company. Fitch Ratings has estimated that the yield on debt issued by AA companies in the current interest rate environment to be 6.6%. The bond has a face value of $100,5 years to maturity and makes semi - annual coupon payments at a coupon rate of 5.4% p.a.
An ordinary share. The share is expected to pay an annual dividend of $14 next year, $12 in year 2, $10 in year 3, and then $9 every year thereafter in perpetuity. Your required rate of return on this share is 10%.
(a) What is the value of the bank bill?
(b) What is the value of the bond?
(c) What is the value of the share?