QUESTION THREE a) A colleague of yours has a K100,000-00, 2 years treasury Bond matunng in ons, 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. What's the maximum price you would offer assuming the yield on a 12 months treasury bill is currently at 12%? [4 Marks] Briefly discuss how you may be affected by inflation over the holding period to maturity [6 Marks] b) A 273 Days Treasury bill of 1,000 Face Value is currently on offer at K840.33. i Calculate its Yield to maturity (YTM) at this price [2 marks] ii. Calculate its Effective Annual Return (APR). [3 Marks] iii. Briefly explain why Treasury bills are treated as risk-free securities [5 Marks) (TOTAL: 20 Marks) Page 3 of 5 QUESTION FOUR You are given the u are given the following data about expected retums on a security on the LUSE We different states of the economy have the same probability of occurrence State Return Strong growth 9.0% Normal growth 6.5% Weak growth 2.5% Recession 4.5% Required: Compute and fully interpret the following for the investment: a) The Expected retum for the security. [3 marks] b) The volatility of the security retums using the standard deviation. [6 Marks] C) Evaluate the security's performance assuming a benchmark target rate of 3.5%. 22 [4 Marks] d) Explain the rationale behind the security performance evaluation method used in (c) above. [7 Marks] [TOTAL: 20 Marks] 3.375 Page 4 of 5 Scanned by Cams