Q5. (i). What would be the value of the bond if, just after it had been issued, the expected inflation rate rose by 2%, causing investors to require a 10% return? Would we now have a discount or a premium bond? (ii). What would happen to the value of this bond over time if the required rate of return remained at 10% until maturity? Show with a graph and explain to the manager.

Q6. (i). What is an approximation of the yield to maturity for this bond if the bond is selling at AED 900? (ii). Explain the management what your fears are, and you believe that the selling price would reach AED 900?

Q7. Calculate the current yield, the capital gains yield, and the duration of the bond (price is found in Q5).

Q8. How would the composition of capital gain yield and current yield for tis bond changes over the time, as the bond approaches to the maturity.?

B. Exercises.[marks 30]

1). A bond pays a coupon of AED 115 every April 1^st for 5 years. Today is October 1, 2019; In September 30rd, 2029 it pays an additional $1,000. YTM is 7.5%. What is the value of the bond?

2). In April 2020 you purchase 100 euros of bonds in Greece which pay a 5% coupon every year. If the bond matures in 2025 (five years) and the YTM is 3.0%, what is the value of the bond?

3). Sheikha just graduated from ZU major in Finance and immediately found a good job in a bank. She plans her retirement. Hence, she contacted an insurance company and she has (a) to choose invest 1,500 aed per quarter at 7.3% compounding for 32 years or invest the corresponding amount of money annually, and (b) to choose when to make payments; at the beginning or the end of the period.

Questions. (I). In which account will I have more money and by how much? (II). Which account will earn the most interest and by how much?

4). Suppose you buy a zero-coupon bond at AED 100. The bond matures in 5 tears and its face value is AED 1,000. Calculate the YTM.

5) A company has systematic risk (or beta factor) 1.25, the risk-free rate of interest is currently 5.45%, and the required return on the market portfolio is 12%. The company plans to pay a dividend of AED 3.05 per share in the coming year (2020) and anticipates that its future dividends will increase at an annual rate consistent with that experienced over the 2001-2003 period:

End of YearDividend

20172.00

20183.00

20192.10

Estimate the stock price value of the company's share using CAPM.