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An ordinary share pays annual dividends. The next dividend is expected to be op per share and is due in exactly six months' time. It is expected that subsequent dividends will grow at a rate of 6% per annum compound and that inflation will be 4% per annum. The price of the share is 175p and dividends are expected to continue in perpetuity. Calculate the expected effective real rote of return per annum for an investor who purchases the share. 16] In a particular country, insurance companies are required by regulation to value their liabilities using spot rates of interest derived from the government bond yield curve. Over time : ( measured in years), the spot rate of interest is equal to: i - 0.021 for t $5 An insurance company in this country has a group of annuity policies which involve making payments of fIm per annum for four years and (2m per annum in the fifth year. All payments are assumed to be paid halfway through the year. (i) Calculate the value of the insurance company's liabilities. [3] (ii) Outline two reasons why the spot yield curve might rise with term to redemption. [3] (iii) Calculate the forward rate of interest from time / = 3.5 to time I = 4.5. [2] [Total 8] A fixed-interest security, redeemable at par in 10 years, pays annual coupons of 9% in arrear and has just been issued at a price to give an investor who does not pay tax a rate of return of 7% per annum effective. (i) Calculate the price of the security at issuc. [2] (ii) Calculate the discounted mean term (duration) of the security at issue. [3] (tii) Explain how your answer to part (ii) would differ if the annual coupons on the security were 3% instead of 9%. [2] (iv) (a) Calculate the effective duration (volatility) of the security at the time of issue. (b) Explain the usefulness of effective duration for an investor who expects to sell the security over the next few months. [3] [Total 10]