A $$1,000$ bond has a coupon rate of $7$ percent and matures after eight years. Interest rates are

currently $5$ percent.

a$)$ What will the price of this bond be if the interest is paid semi$-$annually?

b$)$ What will the price be if investors expect that the bond will be called with no call penalty after

two years? $($semi$-$annual payment$)$

c$)$ What will the price be if investors expect that the bond will be called after two years and there

will be a call penalty of one year$$s interest? $($semi$-$annual payment$)$

#$14\mathrm{.}7$ Bond comparison

Given the following information:

XY Inc. $5\%$ bond

AB Inc. $14\%$ bond

Both bonds are for $$1,000,$ mature in $20$ years, and are rated AAA.

a$)$ What should be the current market price of each bond if the interest rate on triple$-$A bonds is

$10$ percent and coupon is paid semi$-$annually?

b$)$ Which bond has a current yield that exceeds its yield to maturity?

c$)$ Which bond would you expect to be called if interest rates are $10$ percent?