Question 3 • ****Spring 2026 Financial Math - MA2007 MQS21QXV
Four years ago, Sam invested in Grath Oil. She bought three of its $1,000 par value bonds at a market price of 93.938 and with an annual coupon rate of 6.5%. She also bought 450 shares of Grath Oil stock at $44.11, which has paid an annual dividend of $3.10 for each of the last ten years. Today, Grath Oil bonds have a market rate of 98.866 and Grath Oil stock sells for $45.55 per share. Use the scenario above to select the best answer.
Answer
A
It is equally likely that the company would suspend paying interest on the bonds and dividends on the stock.
B
Both the coupon rate and the dividend rate are fixed and cannot change.
C
The bonds showed a higher percentage return than that of the stocks.
D
The amount of money received annually in interest (on the bonds) and in dividends (on the stocks) depends on the current market prices.
Explanation
Each bond cost $939.38 (93.938% of its $1,000 par value) and is now worth $988.66. Over four years, it also paid $260 in coupons ($65 × 4), giving a total return of about 32.9% of the purchase price. Each share gained $1.44 in value and paid $12.40 in dividends over four years, a total return of about 31.4% of its $44.11 purchase price. Therefore, the bonds showed the higher percentage return.
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