QUESTION 2 [20 MARKS]

(a) One of the six key factors that an investor will consider before making an investment in bonds is coupon rate. Explain the TWO (2) types of coupon rate bond. [6 marks]

(b) Illustrate on how the bond price to be affected by the required rate of return and the coupon rate. [6 marks]

(c) If a government bond with a par value of RM1,000 which is expected to mature in three years has a promised coupon rate of 10% and interest rate (yield to maturity) 12%.

(i) Calculate the market value of the government bond. [3 marks]

(ii) Calculate the market value of the government bond if the interest rate rises from 12% to 15%. Summarise the effect on the bond price. [5 marks]