Question: A large corporation issued both fixed- and floating-rate notes five years ago, with terms given in the following table: 9% Coupon Notes Floating-Rate Note Issue

A large corporation issued both fixed- and floating-rate notes five years ago, with terms given in the following table:

9% Coupon Notes Floating-Rate Note

Issue size $250 million $280 million

Maturity 20 years 15 years

Current Price(% of par) 93 98

Current Coupon 9% 5%

Coupon adjusts Fixed coupon Every year

Coupon reset rule ------ 1 year T-Bill rate + 2%

Callable 10 years after issue 10 years after issue

Call price 106 102.50

Sinking fund None None

Yield to maturity 9.9% -------

Price range since issued $85-$112 $97-102

a. Why is the price range greater for the 9% coupon bond than the floating-rate note?

b. What factors could explain why the floating-rate note is not always sold at par value?

c. Why is the call price for the floating-rate note not of great importance to investors?

d. Is the probability of call for the fixed-rate note high or low?

e. If the firm were to issue a fixed-rate note with a 15-year maturity, callable after five years at 106, what coupon rate would it need to offer to issue the bond at par value?

f. Why is an entry for yield to maturity for the floating-rate note not appropriate?

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