Question 2 (This question has three parts (a), (b) and (c))

John has 1,000,000 to invest and he is considering the following two options: 1. He can buy XYZ Ltds corporate bond which has 10 years to maturity with a Coupon Rate of 4.5 % p.a. and Face Value of 100,000. The coupon is paid semi-annually and the Yield to Maturity is 6 percent p.a. 2. He can buy XYZ Ltd ordinary shares where the dividend of $0.5 per share has just been paid. The dividend is expected to grow at a constant rate of 4% forever. The cost of equity capital is 8% p.a.

(a) From Johns point of view, which investment is riskier? Which one has a higher expected rate of return? Explain.

(b) What is the value of each XYZ bond? How many bonds can John buy? (Round your answers to the nearest number).

(c) What is the value of each XYZ ordinary share? The market is selling XYZ shares for $12 per share. Should John buy XYZ shares? Why? How many shares can John buy?

(Round your answers to the nearest number). (5 + 5 + 6 = 16 marks)