Masters Corp. issues two bonds with $20-$year maturities. Both bonds are callable at $$1,050.$ The first bond is issued at a deep discount with a coupon rate of $4\%$ and a price of $$580$ to yield $8\mathrm{.}4\%.$ The second bond is issued at par value with a coupon rate of $83\%4.($Assume annual coupon payment$)$

a$)$ What is yield to maturity of the par bond? Why is it higher than the yield of the discounted bond?

b$)$ If you expect rates to fall substantially in the next $2$ years, which bond would you prefer to hold?

c$)$ In what sense does the discount bond offer "implicit call protection"?

The YTM on $1-$year zero coupon bonds is $5\%$ and the YTM on $2-$year zero coupon bonds is $6\%.$ The YTM on $2-$year maturity coupon bonds with coupon rates of $12\%($paid annually$)$ is $5\mathrm{.}8\%.$ What arbitrage opportunity is available given these prices? Show the cash flows from the arbitrage.

You are working at the investment bank "Gold in Sacks". The table below shows the current STRIPS prices that appear on your computer screen. In the table, "Bond Price" is the price for a STRIP that pays $$100$ on the Maturity Date.

$\backslash$table$[[$Maturity $($years$),$Bond Price $)],[1,$$$97\mathrm{.}94$