This question is worth 10 marks in total. This is a written calculation question, and you should perform the necessary calculations/working on paper to later be scanned and uploaded. Start a new page for this question. For dollar amounts, give your answer to the nearest cent. For interest rates, give our answer as a percentage rounded to 2 decimal places. If any parts of the question use values from earlier parts, use the EXACT values from earlier parts. QUESTION START a) Explain the relationship between the yield to maturity of a par bond and its coupon rate. (1 mark) Duncan recently completed ACST1001 and is hoping to apply what he has learned to start investing. Duncan is interested in a $1,000 18-year bond paying half-yearly coupons with a coupon rate of 7.5%. The yield to maturity for such bonds is 8% p.a. compounding half-yearly. b) Calculate the fair price Duncan should pay for one such bond, given the market conditions described above. (2 marks) c) Suppose that 6 months after he initially purchases this bond, immediately after receiving the coupon on that date, Duncan decides to sell his bond to his friend lan. Ian pays a price that yields 7% p.a. effective. Calculate the price lan paid, ignoring any other costs (such as brokerage). (2 marks) d) Calculate the return on Duncan's 6 month investment, expressed as a percentage. (1 mark) Duncan is also considering investing in shares in a new company, Greene Daeye Ltd. e) Duncan has predicted that the first dividend will be paid will be exactly two years from today, and amount to $4.5. From there, Duncan believes the dividend will grow at 25% p.a. for 4 years. After that, the dividend will grow at 3% p.a. indefinitely. Based on the riskiness of this share, Duncan requires a return of 12% on his investment. Calculate the maximum price he is willing to pay for this share. (3 marks) f) State, and then explain the key difference between bonds and shares. This question is worth 10 marks in total. This is a written calculation question, and you should perform the necessary calculations/working on paper to later be scanned and uploaded. Start a new page for this question. For dollar amounts, give your answer to the nearest cent. For interest rates, give our answer as a percentage rounded to 2 decimal places. If any parts of the question use values from earlier parts, use the EXACT values from earlier parts. QUESTION START a) Explain the relationship between the yield to maturity of a par bond and its coupon rate. (1 mark) Duncan recently completed ACST1001 and is hoping to apply what he has learned to start investing. Duncan is interested in a $1,000 18-year bond paying half-yearly coupons with a coupon rate of 7.5%. The yield to maturity for such bonds is 8% p.a. compounding half-yearly. b) Calculate the fair price Duncan should pay for one such bond, given the market conditions described above. (2 marks) c) Suppose that 6 months after he initially purchases this bond, immediately after receiving the coupon on that date, Duncan decides to sell his bond to his friend lan. Ian pays a price that yields 7% p.a. effective. Calculate the price lan paid, ignoring any other costs (such as brokerage). (2 marks) d) Calculate the return on Duncan's 6 month investment, expressed as a percentage. (1 mark) Duncan is also considering investing in shares in a new company, Greene Daeye Ltd. e) Duncan has predicted that the first dividend will be paid will be exactly two years from today, and amount to $4.5. From there, Duncan believes the dividend will grow at 25% p.a. for 4 years. After that, the dividend will grow at 3% p.a. indefinitely. Based on the riskiness of this share, Duncan requires a return of 12% on his investment. Calculate the maximum price he is willing to pay for this share. (3 marks) f) State, and then explain the key difference between bonds and shares
