Question 1 (20 marks)

(a) John has just bought an 8% bond that pays semi-annual coupons with $1,000 face value and 8

years to maturity.

i) If the yield (APR) of the bond was 10%, what was its purchase price?

(3 marks)

ii) If the bond's YTM (APR) drops to 6% one year later and John sells it immediately after

receiving the coupon, calculate the capital gains yield.

(5 marks)

iii) Could the total yield be computed as the sum of the current yield and the capital gains yield?

Explain.

(3 marks)

(b) Unicorn Ltd. has just distributed a dividend of $5. It is expected that the company will increase

its dividend by 8% in the coming year, and 6% in the second year. After the second year, the

company will maintain the dividend growth rate at 2% per year forever. How much would Stock

Unicorn be worth today if its yearly required rate of return is 4%?

(9 marks)