Question

What should be the prices of the following preferred stocks if comparable securities yield 2 percent? Use calculator to answer the questions. Round your answers to the nearest cent.

MN, Inc., $6 preferred ($80 par) $

CH, Inc., $6 preferred ($80 par) with mandatory retirement after 8 years $ W

hat should be the prices of the following preferred stocks if comparable securities yield 4 percent? Round your answers to the nearest cent.

MN, Inc., $6 preferred ($80 par) $

CH, Inc., $6 preferred ($80 par) with mandatory retirement after 8 years $

In which case did the price of the stock change?

As with the valuation of bonds, an increase in interest rates causes the value of preferred stock to -Select- .

In which case was the price more volatile?

While the prices of both preferred stocks -Select- , the price of the -Select- was more volatile.

Answer 1

Ans:

MN Inc. $6 preferred ($80 par)
= 6/2%
= 300

CH Inc. $6 preferred ($80 par) with mandatory retirement after 8 years

= 6 x 7.325 + 80 x 0.853

= 43.95 + 68.24‬
= 112.19

If securities yield 4%

MN Inc. $6 preferred ($80 par)

= 6/4%
=150

CH Inc. $6 preferred ($80 par) with mandatory retirement after 8 years

= 6 x 6.733 + 80 x 0.731

= 40.398 + 58.48‬
= 98.878‬

Price of the stock change when the valuation of bonds increase in interest rates it causes the value of preferred stock to decrease.

The price is more volatile when the prices of both the preferred stocks decrease , the price of the preferred stock was more volatile.

Note: Calculation values are taken from Interest factor of present value and interest factor of present value of annuity. Its taken as 2% for 8 years and 4% for 8 years.