Suppose that you have Rs 1,000,000 which you are planning to invest in one of the following investment opportunities. Bond: A bond that is selling in the market at Rs 1,100. The bond has a Rs 1,000…

Suppose that you have Rs 1,000,000 which you are planning to invest in one of the following investment opportunities.

Bond: A bond that is selling in the market at Rs 1,100. The bond has a Rs 1,000 par value, pays interest at 12 percent, and matures in 15 years. Your required rate of return for the bond of this class is 14 percent.

Common stock: A common stock with Rs 100 par value that recently paid a Rs 20 dividend (D₀ = Rs 20). The growth rate of dividend is 6 percent per year forever. The stock is selling for Rs 90 and you think that the required rate of return on such stock is 20 percent.

Calculate the value of each security and determine the one in which you would invest. Give reasons for your choice.