QUESTION 1
Jo-Anne just bought 200 bonds at a purchase price of R1 043.70each. The bonds will mature in 7 years’ time and have a face valueof R1 000.00. The coupon rate is 11% and is paidsemi-annually. Answer the questions that follow:
1.1 Calculate the prevailing interest rate. (5)
1.2 If the prevailing interest rate is 12%, what would happen tothe price of the bond? (5)
1.3 If Lee-Anne bought the bonds at R1 043.70 and the prevailinginterest rate changes to 12%, what would the capital gains yieldbe? (4)
1.4. Lee-Anne bought the bonds at R1 043.70 and after four yearsshe decides to sell the bonds while the prevailing interest rate is9%. Answer the following questions relating to this scenario:
1.4.1 Calculate the capital gains yield. (5)
1.4.2 Calculate the current yield. (3)
1.4.3 Calculate the total Rand return. (3)
1.5 Explain in your own words the relationship betweenprevailing interest rates and bond prices and why the prices ofbonds can change. (5)
[30 marks
