Question: A large corporation issues both fixed and floating-rate bonds, with terms given in the following table: COUPON BOND FLOATING-RATE BOND Issue size $250 million $280

A large corporation issues both fixed and floating-rate bonds, with terms given in the following table:

COUPON BOND FLOATING-RATE BOND
Issue size $250 million $280 million
Maturity 20 years 20 years
Current price (% of par) 96 98
Current coupon 8% 7%
Coupon rate Fixed coupon T-bill rate + 2%, adjusts every year
Coupon payment period Every 6 months Every 6 months
Callable 10 years after issue 10 years after issue
Call price (% of par) 106 102

Also given that yield-to-maturity of the fixed-rate coupon bond is 8.37% & yield-to-call of the fixed-rate coupon bond is 9%.

Answer the following questions:

(i) Which bond will have greater price range? Why? (ii) If the firm were to issue another fixed-rate note with a 20-year maturity, what coupon rate would it need to offer to issue the bond at par value? (iii) Which bond has a high call risk (probability of call)? Why?

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