(1) A bond with a face value of $100 has just been issued. The bond...
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(1) A bond with a face value of $100 has just been issued. The bond pays half-yearly coupons of 5% per annum (payable semi-annually) in arrear and is redeemable at par 20 years after issue.
(a) Without any computations, explain why an investor who wants to achieve a (gross) yield of 6% p.a. should pay less than $100 for the bond.
(b) Assume that the investor pays tax at a rate of 20% on income and is not subject to capital gains tax. Calculate the price to provide an investor with a net redemption yield of 6% per annum.
(c) Write down the equation of value for the annual effective gross redemption yield of this bond assuming the price calculated in question (b) is paid, and use linear interpolation with trial values of 5% and 6% to compute the gross redemption yield.
(d) Determine the real annual effective gross redemption yield on this bond if the rate of inflation is constant over the twenty years at 3% per annum.
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