Question 1 (20 marks)

Use the following information for parts A to B.

Ms. Lee has just bought a corporate bond with the following information:

Coupon rate 7% paid annually

Time to maturity 8 years

Face Value $1,000

Yield to maturity 2%

Ms. Lee plans to hold the bond for three years and then she will sell the bond.

A. Assume she is able to sell the bond at $1,000 three years later. Calculate Ms. Lees holding

period return (HPR) on the bond? (4 marks)

B. Assume the bond price is $1,000 when Ms. Lee sells the bond three years later. Calculate

the yield to maturity at the time when she sells the bond. (4 marks)

Use the following information for parts C to D.

Mandy buys 8,000 shares of call options on XYZ Banks stock. The exercise price is $56 and the

premium of the options is $2 per share.

C. Explain what the call options allow Mandy to do if she can exercise the options.

(3 marks)

D. In what situation will Mandy most likely exercise the options? And in what situation will

Mandy most likely not to exercise the options? (4 marks)

E. Mr. Tam buys 5,000 shares of Procom Technology Ltd. stock on margin. The price of the

stock is $15 per share. The initial margin is 35% and the maintenance margin is 25%. The

interest rate of the loan is 6% p.a. Calculate the stock price at which he will receive a margin

call. (5 marks)