Question One (Compulsory) Theory answer (a) Mr Noah Lungu, aged 70, has just won a jackpot on the Zambian Lotto competition worth K 150,000 (net of taxes). He has decided to share the money with his son Dobani, aged 45, and his grandson Pelekani aged 21, in equal amounts i.e. K50,000 each. They are worried that they may misuse the money especially considering that it was not hard-earned and has just come as a wonderful surprise. Using your knowledge of investment analysis and portfolio management, advise each of them on the possible individual investment opportunities supporting your advice with the reasons why they should go for your suggested investments. (9 marks) (b) Suppose that Chimuka Company issues two bonds, A and B, with identical coupon rates and maturity dates. Bond A is callable whereas bond B is not. Explain which bond will sell at a higher price and why. (2 marks) Calculate the price of a 10-year, 8% coupon bond for a market interest rate of 3% per half year with a maturity value of K1000. Compare the capital gains for the interest rate decline to the losses incurred when the rate increases to 5%. (4 marks) & C4 = mtun (d) Using an 8-year, 8% (semi-annual payment) coupon bond and K1000 par value, show the relationship among the coupon rate, current yield and yield to maturity for bonds selling at par. CR (2 marks) (e) A 10-year maturity 9% coupon bond paying coupons semi-annually is callable in 5 de years at a call price of K1,100. The bond currently sells at a yield to maturity of 8%. What is the bond's yield to call? (3 marks) CR 8% Yt im 18% 1070 INT 80 mv 1000 129.2 835.h 2 Question One (Compulsory) Theory answer (a) Mr Noah Lungu, aged 70, has just won a jackpot on the Zambian Lotto competition worth K 150,000 (net of taxes). He has decided to share the money with his son Dobani, aged 45, and his grandson Pelekani aged 21, in equal amounts i.e. K50,000 each. They are worried that they may misuse the money especially considering that it was not hard-earned and has just come as a wonderful surprise. Using your knowledge of investment analysis and portfolio management, advise each of them on the possible individual investment opportunities supporting your advice with the reasons why they should go for your suggested investments. (9 marks) (b) Suppose that Chimuka Company issues two bonds, A and B, with identical coupon rates and maturity dates. Bond A is callable whereas bond B is not. Explain which bond will sell at a higher price and why. (2 marks) Calculate the price of a 10-year, 8% coupon bond for a market interest rate of 3% per half year with a maturity value of K1000. Compare the capital gains for the interest rate decline to the losses incurred when the rate increases to 5%. (4 marks) & C4 = mtun (d) Using an 8-year, 8% (semi-annual payment) coupon bond and K1000 par value, show the relationship among the coupon rate, current yield and yield to maturity for bonds selling at par. CR (2 marks) (e) A 10-year maturity 9% coupon bond paying coupons semi-annually is callable in 5 de years at a call price of K1,100. The bond currently sells at a yield to maturity of 8%. What is the bond's yield to call? (3 marks) CR 8% Yt im 18% 1070 INT 80 mv 1000 129.2 835.h 2