Question 2 (20 marks)

(a) Jocelyn has just bought a 4% bond that pays quarterly coupons with $1,000 face value and 5

years to maturity.

i) If the yield (APR) of the bond was 6%, what was its purchase price?

(3 marks)

ii)

If the bond's YTM (APR) drops to 5% six months later and Jocelyn sells it immediately

after receiving the coupon for the quarter, calculate the 6-month capital gains yield.

(5 marks)

iii) Suppose the bond Jocelyn purchased was a semi-annual coupon bond (instead of a

quarterly coupon bond), could the 6-month total yield be computed as the sum of the

current yield and the 6-month capital gains yield? Explain.

(3 marks)

(b) ABC Ltd. has just distributed a dividend of $4. It is expected that the company will increase

its dividend by 18% in the coming year, and 12% in the second year and third year. Starting

from the fourth year, the company will maintain the dividend growth rate at 10% per year

forever. How much would Stock ABC be worth today if its yearly required rate of return is

12%?

(9 marks)

show calculation step please!!!! Important