Reference no: EM132544904

Sam and Shima are vice-presidents of RST Insurance Company and co-directors of the company's pension fund management division. A major new client, the VW Alliance, has requested that AB Mutual present an investment seminar to the authority of the represented cities, and Sam and Shima, who will make the actual presentation, have asked you to help them by answering the following questions regarding bond market.

Question a. What are the key features of a bond?

Question b. What is the value of a 10-year, RM1,000 par value bond with a 10 percent annual coupon if its required rate of return is 10 percent?

Question c. What would be the value of the bond described in part (b) if, just after it had been issued, the expected inflation rate rose by 3 percentage points, causing investors to require a 13 percent return? Would we now have a discount or a premium bond?

Question d. What is the yield to maturity on a 10-year, 9 percent annual coupon, RM1,000 par value bond that sells for RM887.00? That sells for RM1,134.20? What does the fact that a bond sells at a discount or at a premium tell you about the relationship between rd and the bond's coupon rate?

Question e. What are the total return, the current yield, and the capital gains yield for the discount bond in part (d)? (Assume the bond is held to maturity and the company does not default on the bond.)