Question 1

(show main workings)

1.1) A 15 year bond with a R1,000 face value and a 6% annual coupon pays interest

annually. The bond will mature in 10 years. The nominal yield to maturity is 5%.

a) What is the price of the bond today?

b) What is the current yield of the bond?

c) Yachna Equipment Company recently paid a dividend of R2.30. The company's

policy is to allow its dividend to grow at 4% per year indefinitely. What is the value of the share

if the required rate of return is 10%?

d) What are the two types of risks associate with corporate bonds? (2)

1.2) As a financial advisor, Yachna needs your advice on the following two options:

a) Receive a lump sum of R800 000 now or

b) Receive R180 000 over the next 5 years, assuming discount rate is 6%.

Which option is advisable? Show the necessary calculations.(5)

1.3) John is currently 53 years old and is considering buying an apartment in a retirement village. The apartment is currently selling at R1 200 000 and the estate agent informs him that the value of the house will increase by 6% per annum. He decides that he will invest a fixed amount every end of the year until he retires at the age of 65 years. The bank offers a compound rate of 10% per annum for his investments.

a)What will the house cost when John retires at age 65?

b)How much must he invest at the end of each year to be able to make the cash payment at retirement.