QUESTION 3

Raub Mining Corporation bonds carrying a coupon rate of 8.5% p.a., is selling for $844.40. Coupon interest payments are being paid semiannually and the bonds will mature 15 years from today. If the current market rate is 10%, would you invest in the bond? Explain. (Use 3-decimal places in your calculation)

[Total: 6 marks]

QUESTION 4

A stocks expected return has the following distribution:

Outcome	Probability	Return
Recession	25%	-30%
Expansion	40%	15%
Boom	35%	55%

1. What is the stocks expected return? (2 marks)

2. What is the standard deviation of expected return? (5 marks)

3. Interpret your result. How do you explain the relationship between the expected return and the standard deviation of expected return of this investment? [(Assume a normal probability distribution and the return is within + one standard deviation of the expected return)]

Use 2-decimal places in your calculation.

(1 mark)

[Total: 8 marks]

ANSWER QUESTION 4 IN THE BLANK SPACES BELOW: