FAIM

Exercise sheet 15

[All past City exam questions]

Question 1

A fixed-interest stock bears a coupon of 8% per annum payable half-yearly on 1st April and 1st
October each year. The stock is redeemable at par on any 1st April between 1st April 2012 and 1st
April 2020 inclusive.

On 1st July 1998, an investor purchased £10,000 nominal of the stock at a price giving a net yield of
7% per annum effective after allowing for tax at 30% on the interest received.

On 1st April 2004, the investor sold the holding at a price giving a net yield of 5% per annum effective
after allowing for tax at 30% on interest.

a) Calculate the price at which the stock was bought. [£8,704]

b) Calculate the price at which the stock was sold. [£10,432]

Question 2

An investor, who is liable to income tax at 20% but is not liable to capital gains tax, wishes to earn a
net effective rate of return of 5% per annum.

A bond bearing coupons payable half-yearly in arrear at a rate 6.25% per annum is available. The
bond will be redeemed at par on a coupon date between 10 and 15 years after the date of issue,
inclusive. The date of redemption is at the option of the borrower.

Calculate the maximum price that the investor is willing to pay for the bond. [£100.48]
Question 3
An investor is considering purchasing a holding of shares in ABC plc.
Dividends are paid annually and the next dividend is due in exactly three months’ time. The expected
amount of the next dividend is 10.5p per share.
The investor anticipates that dividends will grow at a constant rate of 4.5% per annum in perpetuity.
Ignoring taxation, calculate the price per share that the investor should pay in order to obtain a gross
yield of 9% per annum effective.
[£2.489 per share]

Question 4

On 1st February 2013, an investor was considering purchasing ordinary shares in XYZ plc.

Dividends are payable annually, and a dividend of 35 pence per share had just been paid.

At the date of purchase, dividends were expected to grow by 5% per annum in the next year and by
4% per annum in the following year. Thereafter, dividends were expected to grow by 3% per annum
in perpetuity.

Calculate the maximum price per share that the investor would have been prepared to pay at this
date to give a rate of return of 9% per annum effective.

You may assume that the investor was not entitled to the dividend which had just been paid.

[£6.18]