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TA AZ ET 1 1632 3 AA QUESTION 1 (14 POINTS) Rai's broker has shown her two bonds. Each has a maturity of 4 years,
TA AZ" ET 1 1632 3 AA QUESTION 1 (14 POINTS) Rai's broker has shown her two bonds. Each has a maturity of 4 years, a par of RM1,000, and a yield to maturity of 10 percent. Bond A has a coupon interest rate of 5 percent paid annually. Bond B has a coupon interest rate of 12 percent paid annually. 1. Calculate the selling price for each of the bonds. b. Rai has RM30,000 to invest. Judging on the basis of the price of the bonds, how many of (4 points) either one could Rai purchase if she were to choose it over the other? (2 points) c. Calculate the yearly interest income of each bond on the basis of its coupon rate and the number of bonds Rai could buy with her RM30,000, (2 points) d. Assume that Rai will reinvest the interest payments as they are paid (at the end of each year) and that her rate of return on the reinvestment is only 8 percent. For cach bond, calculate the value of the principal payment plus the value of Rai's reinvestment account at the end of 4 years. (4 points) e. Why are the two values calculated in (d) above is different? If Rai were worried that she would earn less than 10 percent yield to maturity of the reinvested interest payments which of these two bonds would be better? Explain your answer. (2 points)
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