0518 MOFI204D Semester Group Assignment XXXXXXXXXX5 in a group, total 20%) 1. Why do bond prices go down when interest rates go up? Don’t lenders like high interest rate? 2. Assume that two firms...

0518 MOFI204D Semester Group Assignment (5 in a group, total 20%) 1. Why do bond prices go down when interest rates go up? Don’t lenders like high interest rate? 2. Assume that two firms issue bonds with the following characteristics. Both bonds are issued at par. ABC Bonds XYZ Bonds Issue size RM1.2 billionRM150 million Maturity10 years*20 years Coupon9%10% Collateral First mortgage General debenture Callable Not callableIn 10 years Call price None 110 Sinking fundNone Starting in 5 years *Bond is extendible at the discretion of the bondholder for an additional 10 years. Ignoring credit quality, identify four features of these issues that might account for the lower coupon on the ABC debt. Explain. 3. The Duo Growth company just paid a dividend of RM1 per share. The dividend is expected to grow at a rate of 25% per year for the next 3 years and then to level off to 5% per year forever. You think the appropriate market capitalization rate is 20% per year. (i) What is your estimate of the intrinsic value of a share of the stock? (ii) If the market price of a share is equal to this intrinsic value, what is the expected dividend yield? (iii) what do you expect its price to be 1 year from now? Is the implied capital gain consistent with your estimate of the dividend yield and the market capitalization rate? 4. Explain the purchasing power parity, both the absolute and relative versions. What causes the deviations from the purchasing power parity? Also, explain the following three concepts of purchasing power parity (PPP): (i) The law of one price. (ii) Absolute PPP. (iii) Relative PPP. END