QUESTION START

a) Bella recently completed university and is hoping to apply what she has learned to start investing. The first investment she is considering is corporate bonds. Specifically, Bella is interested in a $1,000 15-year semi-annual coupon bond with a coupon rate of 6%. The annual yield to maturity for such bonds is 4.5%. Calculate the fair price Bella should pay for one such bond, given market conditions.

b) Suppose that 6 months after she initially purchases this bond, immediately after receiving the coupon on that date, Bella decides to sell her bond to her friend Jess. Jess pays a price that yields 4.5% p.a. effective. Calculate the price Jess paid, ignoring any other costs (such as brokerage).

c) Calculate the return on Bellas 6 month investment, expressed as a percentage.

d) Bella is also considering investing in shares in a new company, Greene Daeye Ltd. Bella can buy either ordinary shares or preference shares. Bella has decided to purchase an ordinary share. She has predicted that the first dividend will be paid will be exactly two years from today, and amount to $4. From there, Bella believes the dividend will grow at 25% p.a. for 2 years. After that, the share will grow at 3% p.a. indefinitely. Based on the riskiness of this share, Bella requires a return of 12% on her investment. Calculate the maximum price she is willing to pay for this share.