(1) The market value of the bond can be calculated by the following formula :-

PV₀ = FV / (1 + r)ⁿ

PV = present value

FV = Future Value

r = discount rate/ rate of return/ yield of bond

n = time period

Here, the par value of the zero coupon bond = $1000

yield = 12% ;

n = 14 years

Therefore, the market value of the bond :-

PV₀ = FV / (1 + r)ⁿ

Or, PV₀ = 1000 / (1 + 0.12)¹⁴

= 1000 / (1.12)¹⁴

= 1000 / 4.887112

= $204.62

Hence, the market value of the given bond = $204.62. Thus the correct option is (B).

(2) We can solve the given problem by using the Constant Growth Model (also called the Gordon Growth Model). When a company pays out dividend each year at a constant rising rate, we can estimate the value of the co.'s stock by a formula that assumes the constantly growing dividend payout per year is is responsible for the stock's intrinsic value. This Constant Growth Model can be formulated mathematically as follows :-

P₀ = D₁ / (K_e - g)

where, P = stock's current market price

D₁ = expected dividend payout of the company

K_e = reqd. rate of return on the stock

g = dividend growth rate

The data we get from the above question :-

D₁ = $4.00 per share

g = 3%

K_e = ?

P₀ = $40

Hence, putting the data in the constant growth model, we get :-

P₀ = D₁ / (K_e - g)

Or, $40 = $4 / (K_e - 0.03)

Or, 40 * (K_e - 0.03) = 4

Or, 40K_e - 1.2 = 4

Or, 40K_e = 4 + 1.2

Or, 40K_e = 5.2

Or, K_e = 5.2 / 40

Or, K_e = 0.13

Or, K_e = 13%

Therefore, the required rate of return on the stock = 13.00%. Thus the correct option is (C).

(3) The correct option is :- (D) All of the above.

A higher interest rate would reduce the price of corporate bonds because most of the corporate bonds pay a coupon rate or a fixed interest rate. Thus, when the market interest rates are lower, these bonds are in high demand among the investors and consequently the prices are also higher. But a higher market interest rate mean investors would no longer prefer the lower fixed interest rate paid by the bond. As a result the bond price declines.

A higher interest rate would reduce the price of preferred stock - Preferred stocks are a kind of equity shares paying fixed dividends. They often pay relatively higher dividends as compared to common stocks. However, the market price of the preferred stock is sensitive to the market interest rates. The market value of the preferred stock falls if the interest rate rises as then they will offer relatively lower yields. Similarly, the opposite holds true i.e the preferred share price increases when the interest rate falls.

A higher interest rate (discount rate) would reduce the price of common stock - The Federal Reserve adjusts the federal funds rate from time to time to control inflation. This federal funds rate is called the discount rate or the interest rate that actually affects the stock market. When this interest rate/ federal funds rate rises, the cost of borrowing money for the banks, business firms, individual customers rises. This affects the stock prices negatively.