Question 1 (30 marks) Use the following information for parts A to C Mr Pang is thinking about buying the bond issued by King Limited The bond has a time to maturity of 10 years The credit rating of the bond is BBB by Standard and Poors (S P) rating The coupon rate is 5 p a and the coupons are paid semi annually The par value of the bond is $1,000 The bond price is $950 Is the bond of King Limited an investment grade bond Explain your answer (4 marks) Calculate the yield to maturity of the bond (6 marks) Suppose it is one year later now The credit rating of the bond is still BBB The yield to maturity is 4 p a Calculate the bond price (6 marks) Use the following information for parts D to E Mr Pang is also thinking about buying the stock of Queen Limited The current stock price is $138 per share His stock broker provides margin trading on stocks The initial margin required is 30 and the maintenance margin is 25 The interest rate charged by his broker is 10 p a Mr Pang would like to buy 10,000 shares with the margin provided Calculate the stock price at which Mr Pang will receive a margin call from his broker (8 marks) Suppose the stock price never reaches the level of margin call The stock price is $140 per share 6 months later Calculate Mr Pangs holding period return of the leveraged investment (6 marks)

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Question 1 (30 marks) Use the following information for parts A to C. Mr. Pang is thinking about buying the bond issued by King Limited.

Question 1 (30 marks)

Use the following information for parts A to C.

Mr. Pang is thinking about buying the bond issued by King Limited. The bond has a time to maturity of 10 years. The credit rating of the bond is BBB by Standard and Poors (S&P) rating. The coupon rate is 5% p.a. and the coupons are paid semi-annually. The par value of the bond is $1,000. The bond price is $950.

Is the bond of King Limited an investment grade bond? Explain your answer. (4 marks)

Calculate the yield to maturity of the bond. (6 marks)

Suppose it is one year later now. The credit rating of the bond is still BBB. The yield to maturity is 4% p.a. Calculate the bond price. (6 marks)

Use the following information for parts D to E.

Mr. Pang is also thinking about buying the stock of Queen Limited. The current stock price is $138 per share. His stock broker provides margin trading on stocks. The initial margin required is 30% and the maintenance margin is 25%. The interest rate charged by his broker is 10% p.a. Mr. Pang would like to buy 10,000 shares with the margin provided.

Calculate the stock price at which Mr. Pang will receive a margin call from his broker. (8 marks)

Suppose the stock price never reaches the level of margin call. The stock price is $140 per share 6 months later. Calculate Mr. Pangs holding period return of the leveraged investment.(6 marks)