1. Which bonds should Sporer expect to have the highest and the lowest credit ratings? What does the times-interest-earned number indicate about the probability of any of the bonds defaulting in the immediate future? Does the times-interest earned of 5.4 apply to each bond or all of them?

2. Each bond has 20 years to maturity and is selling for its par value. What explains the differences in yields? Are these yields current yields or anticipated yields?

3. Since duration is one measure of price volatility, what is the duration of each bond? What assumptions must be made to answer this question? Why may duration have little applicability to some of the bonds, and which ones?

4. If, after one year, interest rates are essentially unchanged and the price of the stock remains in the doldrums at $8.50, what should be the price of each bond?

5. If, after five years have elapsed and interest rates have risen 2 percentage points (200 basis points) across the board, what should be the price of each bond? What assumptions must be made to answer this question?

6. If, after ten years have elapsed, interest rates have declined by 2 percentage points and the stock indexes have risen 9 percent annually, what should be the price of each bond? What assumptions must be made to answer this question?

7. Given prices in Question 6, what are the annualized returns on each bond? If Sporer believes that the situation in Question 6 is the most likely scenario, what course of action should he recommend today?

Nikolas Sporer is a financial analyst with an investment company that specializes in fixed income securities. The firm's portfolio managers have shown an interest in the bonds issued by PetSupport, a rapidly growing firm that specializes in catering to the pets of baby boomers. PetSupport has several bonds outstanding. Each bond matures in 20 years and is sold in units of $1,000. The current price of each bond is $1,000, and the price of the stock is $8.50. The specific features associated with each bond are as follows:

A 4% convertible debenture

conversion price $10

(bond may be converted at any time)

call price $1,000 + one year's interest

sinking fund retires 10 percent of the bond each year starting after ten years have elapsed.

B 8% subordinated debenture

call price $1,000 + one year's interest

no sinking fund

C 6% mortgage bond

call price $1,000 + one year's interest

sinking fund retires 5 percent of the issue each year

D 7% callable debenture

callable after ten years at par

sinking fund retires 5 percent of the issue each year

E 6% put bond

put may be exercised after ten years

sinking fund retires 10 percent of the bond each year starting after ten years have elapsed.