Question: QUESTION 1: (08) A. There are two bonds: a 20-year bond offering annual coupons of 10 percent, and a 20- year pure discount bond. If

QUESTION 1: (08) A. There are two bonds: a 20-year bond

QUESTION 1: (08) A. There are two bonds: a 20-year bond offering annual coupons of 10 percent, and a 20- year pure discount bond. If the interest rates fall from 10 to 8 percent, which bond will face more decrease in price? Justify your answer with theoretical argument(s). B. Dr. Corona is interested in buying ordinary shares of Open Book Ltd. Based on information available to him; he estimates that the company will pay the following dividends in the next five years. Year-end Dividend per Share (Rs.) 1 4.5 2 5.1 3 5.1 4 6.25 5 6.5 He also estimates that at the end of fifth year, he will be able to sell the shares at Rs. 40. What is the maximum price he would pay today if his rate of return for this kind of risk is 12%

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