3. Peters broker has shown him two bonds, Bond Angkasa and Bond Berjaya. Each has a maturity of 5 years, a par value of RM1,000, and a yield to maturity of 12%. Bond Angkasa has a coupon interest rate of 6% paid annually. Bond Berjaya has a coupon interest rate of 14% paid annually as well.

(a) Calculate the selling price for each of the bonds.

(4 marks)

(b) Peter has RM20,000 to invest. Judging on the price of the bonds, how many of Bond Angkasa and Bond Berjaya could Peter purchase if he were to choose it over the other? Peter cannot purchase a fraction of a bond.

(4 marks)

(c) Determine the yearly interest income of each bond based on its coupon rate and the number of bonds that Peter could buy with his RM20,000. (4 marks)

(d) Assume that Peter will reinvest the interest payments as they are paid at the end of each year and the rate of return on the reinvestment is only 10%. For each bond, calculate the value of principal payment plus the value of Peters reinvestment account at the end of the 5 years.

(4 marks)

(e) Explain why the two values calculated in part (d) are different? If Peter were worried that he would earn less than 12% yield to maturity on the reinvested interest payments, which of these two bonds would be a better choice?

(4 marks)