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Junior just received his annual bonus and is looking to invest it in one of two potential investments. Junior is considering a 15-year 8% coupon bond issued by HomeCo that is currently selling for $1,032.67. His other option is to buy stock in Residential Inc. Residential just issued a $1.05 dividend and expects to grow at 5.5%. Residential’s current stock price is $45.82. If both investments are fairly priced and Junior intends to hold the investment indefinitely, which offers a higher return?
Answer: The Residential Inc stock, it offers return of 7.92% compared to the bond’s return of 7.63%
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