1- A loan of nominal amount $100,000 is to be issued bearing coupons payable quarterly in arrear at a rate of 5% per annum.

1- A loan of nominal amount $100,000 is to be issued bearing coupons payable quarterly in arrear at a rate of 5% per annum. Capital is to be redeemed at 103 on a
single coupon date between 15 and 20 years after the date of issue, inclusive. The
date of redemption is at the option of the borrower. An investor who is liable to
income tax at 20% and capital gains tax of 25% wishes to purchase the entire loan
at the date of issue. Calculate the price which the investor should pay to ensure a
net eective yield of at least 4% per annum.
2. An investor purchased a bond with exactly 15 years to redemption. The bond,
redeemable at par, has a gross redemption yield of 5% per annum effective. It pays
coupons of 4% per annum, half yearly in arrear. Assume that the investor pays
25% income tax on coupons only.
(a) Calculate the price paid for the bond.
(b) After exactly eight years, immediately after the payment of the coupon then
due, this investor sells the bond to another investor who pays income tax at a
rate of 25% and capital gains tax at a rate of 40%. The bond is purchased by
the second investor to provide a net return of 6% per annum effective.
i. Calculate the price paid by the second investor.
ii. Calculate, to one decimal place, the annual effective net rate of return
earned by the first investor during the period for which the bond was
held.