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.

a) Explain the relationship between the yield to maturity of a premium bond and its coupon rate. (2 marks)

b) ABC Ltd issues two different bonds with the same yield to maturity:

• a 20-year zero coupon bond
• a 15-year semi-annual coupon bond

Explain which bond is subject to less interest rate risk. (2 marks)

c) ABC Ltd is planning to issue 16-year semi-annual coupon bonds with a face value of $1,000 and a coupon rate of 6.5%. The nominal yield to maturity of potential investors is estimated to be 7.6% per annum. Calculate the required number (expressed as an integer) of semi-annual coupon bonds to be issued if the firm aims to raise $15 million. (3 marks)

d) You purchase a bond issued by XYZ Ltd, which is a 9% semi-annual coupon bond with a term to maturity of 12 years, and currently trading at par. 3 years later, immediately after receiving the 6^th coupon payment, you sell the bond to your best friend. You best friends nominal yield to maturity is 7% per annum. Write down an equation that can be solved to find your total realised return over the 3-year holding period. (3 marks)

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