Section A:1. Consider a bond with a par value of £1,000, a coupon rate of 3%, a maturity of 30 years and one coupon instalment per year. The market interest rate of this bond is currently 3.25%. Calculate the bond’s current market price. If the bond price were to change to £800 in two years’ time, what would be the interest rate on this bond then? Show your workings in a Word file and/or an Excel worksheet.(10 marks) 2. Consider two assets: Wise stock and Sainsburys’ stock. You believe Wise stock will either go up in price by 35% or go down by 25% next year, with equal probability, and Sainsburys’ stock price will either go up by 25% or go down by 15% next year, with equal probability. Calculate the expected return and standard deviation for each stock. If you were to spread money between the two stocks equally, what would be the expected return and standard deviation of the portfolio, assuming their returns are independent of each other? Explain how it is beneficial to hold the portfolio rather than any one of the two stocks alone. And hypothesise the condition under which the benefit of diversification could be maximised.
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