a) You are considering the purchase of an 8% AA-rated Corporate Bond that is being priced to yield 6%. The bond has 2 years to maturity. (Assume a face value of RM1,000, coupon paid semi-annually). Compute the price of the bond. (5 marks)

(b) Micks broker has shown him two (2) bonds. Each has a maturity of a 5 years, a par value of RM1,000, and a yield to maturity of 12%. Bond A has a coupon rate of 6% paid annually. Bond B has a coupon rate of 14% which is paid annually. (i) Compute the selling price for each of the bonds. (10 marks) (ii) Mick has RM20,000 to invest. Judging on the basis of the price of the bonds, determine how many of either one could Mick purchase if he were to choose it over the other (Mick cannot really purchase a fraction of a bond, but for the purpose of this question, assume that he can). (6 marks) (iii) Compute the yearly interest income of each bond on the basis of its coupon rate and the number of bonds that Mick could buy with his RM20,000. (4 marks)

Question 4

a) Table below shown the spot and one-year forward rates of USD/GBP and USD/EUR. Currency Spot rate Forward rate USD/GBP 1.6000 1.5500 USD/EUR 0.9000 0.9200

If interest rates are 4 percent in New York, 6 percent in London, and 3 percent in Germany, explain where you can get the best return on a covered interest arbitrage for a one-year investment. (Assume: USD100,000 to be invested). (20 marks

(b) An Australian interbank dealer entered into a long position of 10 million AUD/USD0.5120 rate. He later sold 5 million AUD0.5160 rate and he squared off the position @ 0.5075. Determine the profit/ loss in MYR from these transactions (Assume USD/MYR3.8000 rate) (5 marks)