1. A Government has issued two bonds: Bond A will pay a coupon of 100 on 1 January next year, and which will then pay

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1. A Government has issued two bonds: Bond A will pay a coupon of 100 on 1 January next year, and which will then pay coupons on 1 January every year thereafter (forever), with the coupon increasing by 4% every year. Bond B will pay a fixed annual coupon each year (forever), with the coupon being paid on 1 January each year. Assume that the appropriate discount rate for both bonds is 8% in annualized terms. If it is now January 2, and both bonds have the same current price, what is the coupon of Bond B?

A.

175

B.

260

C.

200

D.

233

2.

Liverpool plc is expected to pay a dividend of 5 at the end of next year (i.e., at t=1). Dividends are annual and are expected to grow at a constant growth rate forever afterwards. The current share price is 100. Assuming that shareholders of Liverpool plc. require a rate of return equal to 6.5% per year, what future dividend growth rate would be necessary to make the current share price equal to the fair value of Liverpool plc?

A. 1.0%

B. 1.5%

C. 2.0%

D. 2.5%