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Question 2 (a) Assume today is 1 January 20x2 and that the following bonds mature on 31 December of the relevant year. Face value Quoted

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Question 2 (a) Assume today is 1 January 20x2 and that the following bonds mature on 31 December of the relevant year. Face value Quoted coupon rate Coupon frequency Years to maturity Bond A $100 5% Annual 6 Bond B $100 7% Semi-annual 4 (i) Calculate the quoted price of each of these bonds, assuming that they are both trading at a yield of 6%. (12 marks) ( (ii) State whether each of the bonds is trading at a discount, at a premium or at par. (6 marks) (iii) Explain the role of ratings in bond issuance and the impact of a high rating on both the market price and market yield of the bond. (6 marks) (b) Company C is going through a period of rapid expansion but long-term growth prospects are poor. The rate of return demanded by investors is 4% a year. The board of directors is meeting to consider the best dividend policy for the foreseeable future. They agree on a constant dividend of $2 per share in perpetuity. Required: (i) Calculate Company C's share price, assuming that the next dividend is paid tomorrow. (6 marks)

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