Question 2 (a) Discuss risks and returns characteristics of investing in ordinary shares and corporate bonds from the pe

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Question 2 A Discuss Risks And Returns Characteristics Of Investing In Ordinary Shares And Corporate Bonds From The Pe 1 (99.28 KiB) Viewed 46 times

Question 2 (a) Discuss risks and returns characteristics of investing in ordinary shares and corporate bonds from the perspective of an investor. [6 marks] (b) Consider the following two financial assets: (i) an ordinary share that is expected to pay a dividend of £2 next year with dividend growth expected to be 4% per annum thereafter; (ii) a corporate bond with an annual coupon rate of 7%, par (face) value of £1000, and maturity of 5 years. If the required return on similar UK equities is 10% and on similar UK bonds is 6%, calculate the value of the UK stock and the UK bond. [8 marks] (c) Explain the duration of a bond. Using the data given above (in b), calculate the duration of the corporate bond. [8 marks] (d) An investor is holding bonds with long duration and interest rates are expected to rise. What advice would you give to that investor and why? [6 marks] (e) Discuss the assumptions underlying the Gordon growth model. [5 marks] [Total 33 marks]