Question

A fixed interest stock with an optional redemption date at any time between 14 and 24 years from the date of isssue is redeemable at 1 1 1 %. It pays coupons of 4.1% per annum in arrears. An investor, subject to 32% income tax and 35% capital gains tax, makes a with-dividend purchase half a year after issue a £9,000 nominal of the bond and obtains a net effective yield of 9.7% per annum. Calculate, to 2 decimal places, the price paid by the investor. Answer: 50.33 The correct answer is: 3283.40 Incorrect Marks for this submission: 0.0/4.0.

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Answer 1

Answer Formulae: (Maturity Value + BO)/2 Note: BO is the price paid by investor (A) Interest (B) Capital Gain Yield- .mrbold-.35) i 250.92 250.92 tl(9000 111%)-BOIL 14 24 (9000* 111%+80) 2 (9000*111%+80) 2 (C) Average Cost (D) Net Effective Yield 9.70% 9.70%

Calculation of BO 2425.26 489.10 [(A+B)/C-D Price paid by investor I(2425.26+489.10)/2] 1457.18 Hence The price paid by investor for the bond is $1457.18 Explanation: The Price paid by investor for the Fixed Interest Stock will be d by using the effective yield. Since The company has given an option to redeem it anytime between 14 and 24 years from the date of its issue Hence The price paid i.e. BO has been calculated by taking average of the price determined by considering the Year as 14 and 24.