5.

An investor purchased a bond with exactly 12 years to redemption. The bond pays coupons of 6% per annum quarterly in arrears and is redeemable at 105% of its nominal value. The investor is subject to income tax at 20% but is not liable to any capital gains tax.

(a) Calculate the price per 100 nominal paid for the bond, if the investor aimed to achieve a gross return of 7% per annum effective. [4 marks]

(b) Calculate the price per 100 nominal paid for the bond, if the investor aimed to achieve a net return of 5% per annum effective. [5 marks]

(c) After having held the bond for exactly 4 years and received the coupon payment then due, this investor sold the bond to a second investor who pays income tax at a rate of 25% and capital gains tax at a rate of 30%. The second investor aimed to achieve a net return of 6% per annum effective. Find the price per 100 nominal paid by the second investor for purchasing the bond. [7 marks]

[Total: 16 marks]