Question: Consider the following securities, which are assumed to be risk-free with an opportunity cost of capital (or discount rate) of 10 percent:

(1) A one-year zero-coupon bond paying $550.

(2) A perpetuity paying $50 per year.

(3) A stock offering a $25 dividend at the end of this year and a 5% annual rate of growth in dividend payments forever.

A. Solve for the present values of each of these assets.

B. Suppose that the discount rate increases to 15 percent. Of the securities listed above,

which one will experience the largest change in price? Show and explain the intuition for

your result.