Consider two corporate bonds that are otherwise identical except for the call feature present in one of the bonds. The callable bond is callable at par and can be called at any time.

	Non callable	Callable
Maturity (years)	5	5
Coupon rate	6.25%	6.25%
YTM	6.0547%	6.5366%

a. Compute the price of each bond.

b. Based upon the price of each bond, what is the value of the call option?

c. How do prices of callable bonds react to an increase in interest rates? Explain.

d. Given the present information about the callable bond, is it likely that the company issuing the callable bond will call the bond. Carefully explain.

e. Consider the non-callable bond presented above. Suppose there is another non-callable bond available which is otherwise identical but is convertible with a conversion ratio of 20. The underlying stock is currently selling for $48.25 per share. What is the minimum price of this convertible bond? Carefully explain why you come to this conclusion.