1. Carly Rae Jepson realized that she had roughly 15 minutes, so she decided to invest some of the earnings from her (surprisingly) hit single, Call Me Maybe in fixed income securities. You gave her the following information about two different bonds:

Bond A- 5% coupon, 20 years until maturity, AAA rating, $1000 par value

Bond B- 14% coupon, 20 years until maturity, AAA rating, $1000 par value

1. If AAA bonds are associated with a 10% rate of interest, what would be the current market price of each bond?
2. Does either bond have a Current Yield in excess of its Yield to Maturity? If so, which one(s)?
3. Which bond might you expect to be called(get it!) if interest rates are at 10%?
4. If bond C were introduced (5% coupon, 20 years until maturity, BBB rating), what would you expect its price to be relative to bond A?

1. Dom Toretto lives life on the edge. Fast cars, explosions, and daily visits from the Rock are indicative of his ridiculous lifestyle. Dom wants high-yield bonds (insert your own junk in the trunk joke here). Assume a high-yield bond with the following features:

Par value = $1000, Coupon = 11.5%, Maturity = 10 years, Callable after 2 years with a penalty of 1-years interest.

1. If comparable debt yields 9%, what should the present value of the bond be?
2. If the bond is called after 4 years what is the Yield to Call?
3. What is the Current Yield on this Bond given the assumption of a 9% market rate of interest?
4. Explain whether or not you would expect the firm to call this bond if the current market rate was 9%, providing some reasoning as to why:
5. If comparable yields rose to 13%, what would the price of the bond be?
6. Explain whether or not you would expect the firm to call this bond if the current market rate was 13%, providing some reasoning as to why:

Answer rating: 100% (QA)

To answer these questions well calculate the current market price of each bond determine if either bond has a Current Yield in excess of its Yield to Maturity analyze which bond might be called if int... View the full answer