q.41

Question ID: 329

This question is worth 10 marks in total. This is a written calculation question, and you should perform the necessary calculations/working on paper to later be scanned and uploaded. Start a new page for this question. For dollar amounts, give your answer to the nearest cent. For interest rates, give our answer as a percentage rounded to 2 decimal places.

If any parts of the question use values from earlier parts, use the EXACT values from earlier parts.

QUESTION START

a) ABC 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. (2 marks)

b) DEF 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. (2 marks)

c) Explain the relationship between the yield to maturity of a par bond and its coupon rate. (1 mark)

XYZ 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. (3 marks)

e) Alternatively, XYZ Ltd is looking into issuing 20-year zero-coupon bonds with a face value of $1,000. 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. (2 marks)