A US corporate bond has a coupon rate of 4%, a par (face) value of $1,000 and will mature in 3 years. The current yield on similar bonds is 2.5%. (a) Using the information given above and assuming coupons are paid annually, calculate the value of the corporate bond. (4 marks) (b) Consider the following stocks: - Stock A is expected to pay no dividend next year and then from year 2 onwards a dividend of $3 every year; - Stock B is expected to pay a dividend of $1.5 next year, $2 in year 2 , with dividend growth expected to be 2.5% per annum from year 2. If the required return on similar equities is 8%, calculate the fair price of each stock. (10 marks) (c) Briefly discuss the implications of the assumption of a constant rate of growth in the Gordon Growth model. (4 marks) (d) Explain the yield curve for government bonds and discuss the main theories for explaining the shape of the yield curve. (15 marks)