Describe what happens to the present value of a cash flow stream when the discount rate increases? How does this question correlate with the Fed lowering rates over the last number of years? Hint…low interest rates ..less of a reason to leave money in the Bank.
Determine the yield spread between the corporate bond and the Treasury bond.
Alternatively, you are considering a purchase of Laissez-Faure’s preferred stock. Assume that the preferred stock has a current market price of $42, a par value of $50, and dividend amount of 10% of par. Your required rate of return for investments of this type is 12.5%. Determine if you be willing to buy the firm’s preferred stock. Why or why not?
Explain why investors are more concerned with the real returns than the nominal returns on their investments.