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John invests $100,000 in a newly issued 3 year bond. The bond is issued at par on 1 Jan 2007.The coupon rate is 4%. Interest is paid on each 30 Jun and 31 Dec. On 1 Jan 2008, John finds that the stock market provides better return. Therefore, John sells the bond on 1 Jan 2008. Yield-to-maturity is 4.2% on 1 Jan 2008. All sale proceeds are invested in a stock at $190 per share. During 2008, a dividend of $2 per share is received by John. On 31 Dec 2008, John sells all stock at $195 per share.

a) What is the Yield-to-maturity on 1 Jan 2007 ? Briefly explain why.

b) What are the sale proceeds from disposing the bond on 1 Jan 2008 ?

c) What is the return from investment in the bond in 2007 ?

d) What is the dividend income received by John in 2008 ?

e) What is the return from investment in the share in 2008 ?

f) What is the geometric average return for the 2007 and 2008 investment period?

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