+1 862 207 3288 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 $422A1 today, pays nothing during its 10-year life, and then pays $1,000 at the end of 10 years, or (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 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 be the price of each security after the change in the interest rate?
c. Now assume that the interest rate rose to 12 percent (rather than fell to 6 percent) immediately after the securities are purchased. What would be the price of each security after the change in the interest rate? Explain the results.
