a) Fund manager Sara works for investment company BestInvest SA and is currently analysing two bonds. Today is 1 January 20X2 and the following bonds mature on 31 December of the relevant year.

1) Why should Sara also consider the credit ratings on the two bonds respectively? Explain the role of ratings in bond issuance and the impact of a high rating on both the market price and market yield of the bond.

1.i) The company which issued Bond B is going through a period of rapid expansion but long-term growth prospects are poor. The board of directors is meeting to consider the best dividend policy for the foreseeable future. They agree on a constant dividend of $2 per share in perpetuity. The rate of return demanded by investors is 4% a year. Calculate the companys share price, assuming that the next dividend is paid tomorrow.

	Bond A	Bond B
Face value	$100	$100
Quoted coupon rate	5%	7%
Coupon frequency	Annual	Semi-annual
Years to maturity	6	4