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An investor purchases a bond 4 months after issue. The bond will be redeemed at 110% fifteen years after issue and pays coupons of 7%

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An investor purchases a bond 4 months after issue. The bond will be redeemed at 110% fifteen years after issue and pays coupons of 7% per annum half-yearly in arrears. The investor pays tax of 30% on both income and capital gains. (i) Calculate the purchase price of the bond per 100 nominal to provide the investor with a rate of return of 5% per annum effective. (ii) The real rate of return expected by the investor from the bond is 2% per [6 marks] annum effective. Calculate the annual rate of inflation expected by the investor. [2 marks] (iii) Without doing any further calculations, explain state with reasons whether the price would have been higher, lower or the same as the price calculated in (i) if the investor has bought the stock 5 months after issue. [2 marks]

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