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10 An investor purchased a bond with exactly 20 years to redemption. The bond, redeemable at par, has a gross redemption yield of 6%. It
10 An investor purchased a bond with exactly 20 years to redemption. The bond, redeemable at par, has a gross redemption yield of 6%. It pays annual coupons, in arrears, of 5%. The investor does not pay tax. (a) Calculate the purchase price paid for the bond [3] (b) After exactly ten years, immediately after payment of the coupon then due, this investor sells the bond to another investor. That investor pays income and capital gains tax at a rate of 30%. The bond is purchased by the second investor to provide a net rate of return of 6.5% per annum. (i) Calculate the price paid by the second investor. [6] (ii) Calculate the annual effective rate of return earned by the first investor during the period for which the bond was held. 4
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