Please solve on paper and show all working out (no excel). If any parts of the question use values from earlier parts, use the EXACT values from earlier parts.

QUESTION 1

a) Abacus Ltd issues two different bonds, a 5-year semi-annual coupon bond and a 10-year zero coupon bond with the same yield to maturity. Explain which bond is subject to more interest rate risk.

b) Delta Ltd issues two different bonds, a 5-year coupon bond and a 10-year coupon bond with the same yield to maturity. Explain which bond you would buy if interest rates are expected to drop in the future.

c) Explain the relationship between the yield to maturity of a par bond and its coupon rate.

XRay Ltd wishes to raise $24 million to fund its investment projects.

d) The company is planning to issue 15-year semi-annual coupon bonds with and a coupon rate of 7% and a face value of $1,000. The nominal annual yield to maturity of investors is expected to be 6.5% per annum. Calculate the required number of semi-annual coupon bonds to raise $24 million.

e) Alternatively, Xray Ltd is looking into issuing 20-year zero-coupon bonds with a face value of $1000. The desired effective annual yield to maturity of investors is expected to be 8%. Calculate the required number of zero-coupon bonds to raise $24 million.