Question 2. Answer all parts of the question I. Consider the following three bonds:

Par Value Coupon

Time to Maturity Required Yield

Bond R 1,000 9%

3 years 6%

Bond S 1,000 6%

4 years 6%

Bond T 1,000 Zero 6 years 6%

(a) Calculate and interpret the present values of each bond.

(b) Calculate and interpret the Macaulay Duration for each bond.

(10 marks)

(7 marks)

(c) An investor decides to reduce the holding of Bond R and to increase the holding of Bond T. Comment on the investor action and his expectation for future interest rate changes.

II. An investor obtains the following beta values for a set of stocks:

Share Beta Share Beta Share Beta Share Beta

Bessis 0.5 Jordan 0.4 Myers 1.1 Neale 0.1

(3 marks)

The risk-free rate of interest is 4%.

Calculate the beta values for the following portfolio and interpret the result:

Portfolio F: Bessis (2200), Jordan (500), Myers (700) and 1600 in the risk-free asset.

(5 marks)

IV. Discuss the main participants in the credit rating industry and the role of credit ratings in financial markets. (800 words maximum). (25 marks)

Zero Question 2. Answer all parts of the question 1. Consider the following three bonds: Bond R Bond S Bond T Par Value 1,000 1,000 1,000 Coupon 9% 6% Time to Maturity 3 years 4 years 6 years Required Yield (a) Calculate and interpret the present values of each bond. (10 marks) (b) Calculate and interpret the Macaulay Duration for each bond. (7 marks) (e) An investor decides to reduce the holding of Bond R and to increase the holding of Bond T. Comment on the investor action and his expectation for future interest rate changes. (3 marks) 6% II. An investor obtains the following beta values for a set of stocks: Share Beta Share Beta Share Beta Share Beta Bessis 0.5 Jordan 0.4 Myers 1.1 Neale 0.1 The risk-free rate of interest is 4%. Calculate the beta values for the following portfolio and interpret the result: Portfolio F: Bessis (2200), Jordan (500), Myers (700) and 1600 in the risk-free asset. (5 marks) IV. Discuss the main participants in the credit rating industry and the role of credit ratings in financial markets. (800 words maximum). (25 marks) [Total 50 marks] Zero Question 2. Answer all parts of the question 1. Consider the following three bonds: Bond R Bond S Bond T Par Value 1,000 1,000 1,000 Coupon 9% 6% Time to Maturity 3 years 4 years 6 years Required Yield (a) Calculate and interpret the present values of each bond. (10 marks) (b) Calculate and interpret the Macaulay Duration for each bond. (7 marks) (e) An investor decides to reduce the holding of Bond R and to increase the holding of Bond T. Comment on the investor action and his expectation for future interest rate changes. (3 marks) 6% II. An investor obtains the following beta values for a set of stocks: Share Beta Share Beta Share Beta Share Beta Bessis 0.5 Jordan 0.4 Myers 1.1 Neale 0.1 The risk-free rate of interest is 4%. Calculate the beta values for the following portfolio and interpret the result: Portfolio F: Bessis (2200), Jordan (500), Myers (700) and 1600 in the risk-free asset. (5 marks) IV. Discuss the main participants in the credit rating industry and the role of credit ratings in financial markets. (800 words maximum). (25 marks) [Total 50 marks]