An investment fund is considering two long term investments. Which investment offers the best rate of return assuming equal risks and a 10 year investment?
Bond: Coupon bond with a face value of $100,000 that can be purchased today for $70,000 that matures in 10 years. Its annual coupon rate is 8% paid semi-annually.
Stock: A stock whose shares can be purchased for $84 per share today and its price is forecast to grow 12% annually for the next 10 years. It will pay dividends of $1.50 semi-annually. Note that the future price of the stock can be calculated using the annual growth rate and the FV function.
Briefly discuss your recommendation.