Two bonds paying annual coupons of 5% in arrear and redeemable at par have terms to maturity of exactly one year and two years, respectively. The gross redemption yield from the 1-year bond is 4.5% per annum effective; the gross redemption yield from the 2-year bond is 5.3% per annum effective. You are informed that the 3-year par yield is 5.6% per annum. Calculate all zero-coupon yields and all one-year forward rates implied by the yields given above. [12] A loan pays coupons of 11% per annum quarterly on 1 January, 1 April, 1 July and 1 October each year. The loan will be redeemed at 115% on any 1 January from 1 January 2015 to 1 January 2020 inclusive, at the option of the borrower. In addition to the redemption proceeds, the coupon then due is also paid. An investor purchased a holding of the loan on 1 January 2005, immediately after the payment of the coupon then due, at a price which gave him a net redemption yield of at least 8% per annum effective. The investor pays tax at 30% on income and 25% on capital gains. On 1 January 2008 the investor sold the holding, immediately after the payment of the coupon then due, to a fund which pays no tax. The sale price gave the fund a gross redemption yield of at least 9% per annum effective. Calculate the following: (i) The price per 100 nominal at which the investor bought the loan. (ii) The price per 100 nominal at which the investor sold the loan. [6] [4] (iii) The net yield per annum convertible quarterly that was actually obtained by the investor during the period of ownership of the loan. [5] [Total 15]