QUESTION TWO

John and Joseph are Vice presidents of Copperbelt Money Management (CMM) and co-directors of the companys pension fund management division. A major new client, the Nkana League of Cities, has requested that CMM present an investment seminar to the mayors of the represented cities. John and Joseph, who will make the presentation, have asked you to help them by answering the following questions.

1. 1. What are a bonds key features? (4 Marks)
   2. How is the values of any asset whose value is based on expected future cash flows determined? (1 mark)
   3. What is the value of a 10-year, $1,000 par value bond with a 10% annual coupon, paid semi-annually, if its required return is 10%? (2 Marks)
   4. I. What is the value of a 13% coupon bond that is otherwise identical to the bond described in part c above? Would we now have a discount or a premium bond? (2 Marks)
2. What is the value of a 7% coupon bond with these characteristics? Would we now have a discount or premium bond? (2 Marks)
3. What would happen to the values of the 7%, 10% and 13% coupon bonds over time if the required return increased to 13%? (3 Marks)

5. I. what is the yield to maturity on a 10-year, 4% semi-annual coupon, $ 1,000 par value bond that sells for $ 887.00 and another that sells for $ 1,134.20? What does the fact that it sells at a discount or at a premium tell you about the relationship between and the coupon rate? (3 Marks)

II. what are the total return, the current yield and the capital gains yield for the

premium bond in parts e(1)? Assume that it is held to maturity and the company does not default on it. (3 Marks)

[TOTAL: 20 MARKS]