Question
(a) Discuss risks and returns characteristics of investing in ordinary shares and corporate bonds from the perspective of the issuing firm. [6 marks] (b) Explain
(a) Discuss risks and returns characteristics of investing in ordinary shares and corporate bonds from the perspective of the issuing firm. [6 marks] (b) Explain the Gordon Growth model of equity valuation and explain what kind of stocks this valuation model is most appropriate for. [6 marks] (c) Consider the following two financial assets: (i) an ordinary share that is expected to pay a dividend of 3 next year with dividend growth expected to be 5% per annum thereafter; (ii) a corporate bond with an annual coupon rate of 8%, par (face) value of 100, and maturity of 5 years. If the required return on similar UK equities is 8% and on similar UK bonds is 7%, calculate the value of the UK stock and the UK bond. [8 marks] (d) Explain duration of a bond. Using the data given above (in c), calculate the duration of the corporate bond. [8 marks] (e) Distinguish between primary and secondary capital markets. [5 marks]
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