PART A:

Mr. Raza and Mr. Arslan had PKR 100,000 each at the start of year 2015. The interest rate in January 2015 is 9%. Mr. Raza placed his money in a saving account for two years.Mr. Arslan invested this money in a coupon bond having a coupon rate of 9% and one-year maturity. He used all proceeds generated at the end of year 2015 from the initial bond to purchase another bond with a maturity of one year. The interest in January 2016 has increased to 12%.

a.How much return Mr. Raza and Mr. Arslan have earned at the end of the year 2016?

b.What is the annualized rate of return for both investors?

c.Explain the rationale behind the decision of Mr. Arslan.

Is Expectation Theory applicable to the above scenario? Why or Why not?

PART B:

(a) The yield on a corporate bond is 10% and it is currently selling at par. The marginal tax rate is 20%. A par value municipal bond with a coupon rate of 8.50% is available. Which security is a better buy?

(b) If the municipal bond rate is 4.25% and the corporate bond rate is 6.25%, what is the marginal tax rate assuming investors are indifferent between the two bonds?

PART C:

1):A 2-year $1,000 par zero-coupon bond is currently priced at $819.00. A 2-year $1,000 annuity is currently priced at $1,712.52. If you want to invest $10,000 in one of the two securities, which is a better buy? (Hint: Calculate Yield to Maturity of both the options).

2):An investor in England purchased a 91-day $1000 T-bill for $987.65. At that time, the exchange rate was $1.75 per pound. At maturity, the exchange rate was $1.83 per pound. What was the investor's holding period return in pounds?