Question: QUESTION 2 (10 marks) (a) There are 4 main risks reflected in bond yields and bondholders require a return premium to compensate for them. (5

QUESTION 2 (10 marks) (a) There are 4 main risks reflected in bond yields and bondholders require a return premium to compensate for them. (5 marks) I. These risks are inflation, liquidity and which two other risks? ii. Which of these 4 risks is reflected in a yield curve? ii. Which of these 4 risks has been of most concern in bond markets in the past 6 months and what effect has it had on bond prices? Explain briefly. (b) Each of the bonds in the following table has a $100 par value. Calculate the missing values. (5 marks) Bond Coupon Coupon Years to Yield to Bond interest rate payment maturity maturity price ($) (% p.a.) (% p.a.) 10 Semi-annual 8 12 Y 3 Annual 8 90

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