Consider a K1,000-00, 3 year Corporate Bond issued two years ago for a price of K820-00 and a fixed coupon rate of 10%. The annual coupon is paid at the end of each year.

Required:

a)If the 12 months yield on similar risky bills is currently at 15%, explain if you would consider buying the bond at K980.

[05 Marks]

b)If you were told that the yield on 12 months Treasury Bills is currently 14%, explain which one (Bond or Bill) you would consider for a 12 months holding period?

[05 Marks]

a)Given (b) above, what would be your expected yield if you are willing to buy the bond at K845?

[05 Marks]

b)Explain the components of the bond's Holding Period Return (HPR) and comment whether any of them can be negative.

[05 Marks]