I. Consider the following three bonds:

                                          Bond N                Bond S              Bond T

Par Value                         £1,000                  £1,000              £1,000

Coupon                               8%                          12%               Zero

Time to Maturity           3 years                      3 years         5 years

Required Yield                  8%                             8%                 8%

(a) Calculate and interpret the present values of each bond. (11 marks)

(b) Calculate and interpret the Macaulay Duration for each bond. (7 marks)

(c) An investor decides to reduce the holding of Bond T and to increase the holding of Bond S. Comment on the investor’s expectation for future interest rate changes? (3 marks)

II. You are considering a new project that costs £2700m and you have estimated the following cash flows: Year 1: £700m; Year 2: £1000m; Year 3: £1300m. If the discount rate is 10%, do you recommend the project? (4 marks)

III. Using examples, explain how securities are traded in financial markets. (25 marks)