Question: QUESTION 4 [25 MARKS] (a) You own a bond that pays Rs120 in annual interest, with a Rs 1,000 par value. It matures in 15

QUESTION 4 [25 MARKS]

(a) You own a bond that pays Rs120 in annual interest, with a Rs 1,000 par value. It matures in 15 years. Your required rate of return is 12% per annum.

(i) Calculate the value of the bond. [3 marks]

(ii) How does the value of the bond change if your required return increases to 15%. [2 marks]

(iii) How does the value of the bond change if your required return decreases to 8%. [2 marks] (iv) Draw an appropriate yield curve and explain the relationship. [3 marks]

(b) On average, investors in the stock market this year are expected to earn a positive return (profit) on their investment. Some investors will earn considerably more than others.

(i) Using the concept of Efficient Market Hypothesis, discuss why is it so?[9 marks] (ii) Explain any 2 anomalies that may incur in the stock market.[6 marks]

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