+1 862 207 3288 1. What will be the rate of return on a perpetual bond with a $1,000 par value, an 8 percent coupon rate, and a current market price of (a) $600, (b) $800, (c) $1,000, and (d) $1,500? Assume that interest is paid annually.
2. As investment manager of Pasco Electric Company's pension plan (which is exempt from income taxes), you must choose between IBM bonds and AT&T preferred stock. The bonds have a $1,000 par value, mature in 20 years, pay $40 every six months, and sell at a price of $897A0 per bond. The preferred stock is a perpetuity; it pays a dividend of $2 each quarter, and it sells for $95 per share. What is the effective annual rate of return (EAR) on the higher-yielding security?
