QUESTION 3

1. A colleague of yours has a K100,000-00, 2 years treasury Bond maturing in 12 months, issued at a fixed coupon of 10%, payable annually. He informs you that he has an urgent need of money and wants to sell you the Bond.

1. Whats the maximum price you would offer assuming the yield on a 12 months treasury bill is currently at 12%?

[04 Marks]

2. Briefly discuss how you may be affected by inflation over the holding period to maturity.

[06 Marks]

2. A 273 Days Treasury bill of K1,000 Face Value is currently on offer at K840.33.

1. Calculate its Yield to maturity (YTM) at this price.

[02 Marks]

2. Calculate its Effective Annual Return (APR).

[03 Marks]

3. Briefly explain why Treasury bills are treated as risk-free securities. [05 Marks]

Total 20 Marks