1. Calculation Problem: Work must be submitted after the exam. What is the fair market price of a bond with the following characteristics:
   • Matures in 10 years for $1,000 principal amount,
   • is callable in 5 years for $1,000 principal amount,
   • has an annual coupon of 2.5%
   • is issued by a corporation with a credit rating of AA

in a market environment with the following characteristics;

U.S. Treasury debt annual coupon yield curve

2yr: 2.0% 5yr: 3.0% 10yr: 3.5% 30yr: 4.0%

AA credit risk premium by bond term (in basis points)

2yr: 30 5yr: 40 10yr: 50 30yr: 60

Additional risk premium for callable securities (in basis points): 20