On May 30, 2011, Alessandra Burke is considering purchasing one of the newly issued 10-year AAA corporate bonds shown in the following exhibit. Alessandra notes that the yield curve is currently flat and assumes that the yield curve shifts in an instantaneous and parallel manner.

a. Contrast the effect on the price of both bonds if yields decline more than 100 basis points. (No calculation is required).
b. State and explain under which two interest rate forecasts Alessandra would prefer the Celeste bond over the Sophie bond.
c. State the directional price change, if any, assuming interest rate volatility increases, for each of the following:
(1) The Sophie bond
(2) The Celestebond

Transcribed Image Text:

BOND CHARACTERISTICS Description Sophie due May 30, 2021 Celeste due May 30, 2021 Coupon Price Callable 6.00% 6.20% Call Price Not applicable 102.00 100.00 100.00 Non callable Currently callable skil