A,) A bond pays income of 7% p.a. half-yearly in arrears and is redeemed at par after 15 years. An investor initially bought €100k nominal of the stock at a price so as to obtain a net yield of 5% p.a. effective after allowing for income tax at 20%.
a) Calculate the price at which the stock was bought by the investor.
After 10 years the investor sold the stock to a second investor so as to give a net yield of 6% p.a. effective to that second investor, who paid income tax at the rate of 25% and capital gain tax at the rate of 30%.

b) Calculate the price at which the second investor bought the stock.

B) A billionaire wants to set up a foundation to provide financial support to undergraduates in university. The financial support would be in a form of student grant. The costs are as follow
 Fee grant: €1,391,000 p.a. payable in arrears from the start of the fund.
 Research and qualification cost: €30,000 p.a. payable continuously from half year before the date of grant to the date of grant.
Assuming the interest rate is 6% p.a. effective, calculate the amount of investment needed to start the fund if the billionaire wants the fund to run forever.

Answer rating: 100% (QA)

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