【正文】 t the par value of $1,000 because the yield to maturity is forecast to equal the coupon rate. Therefore, total proceeds in three years will be: $ + $1,000 = $1,Then find the rate (yrealized. that makes the FV of the purchase price equal to $1,:$960 (1 + = $1, 222。 yrealized = % (semiannual.Alternatively, PV = ?$960。 FV = $1,。 N = 6。 PMT = $0. Solve for I = %.b. Shortings of each measure:(i) Current yield does not account for capital gains or losses on bonds bought at prices other than par value. It also does not account for reinvestment ine on coupon payments.(ii) Yield to maturity assumes the bond is held until maturity and that all coupon ine can be reinvested at a rate equal to the yield to maturity.(iii) Realized pound yield is affected by the forecast of reinvestment rates, holding period, and yield of the bond at the end of the investor39。s holding period.3. a. The maturity of each bond is 10 years, and we assume that coupons are paid semiannually. Since both bonds are selling at par value, the current yield for each bond is equal to its coupon rate.If the yield declines by 1% to 5% (% semiannual yield., the Sentinal bond will increase in value to $ [n=20。 i = %。 FV = 100。 PMT = 3].The price of the Colina bond will increase, but only to the call price of 102. The present value of scheduled payments is greater than 102, but the call price puts a ceiling on the actual bond price.b. If rates are expected to fall, the Sentinal bond is more attractive: since it is not subject to call, its potential capital gains are greater.If rates are expected to rise, Colina is a relatively better investment. Its higher coupon (which presumably is pensation to investors for the call feature of the bond. will provide a higher rate of return than the Sentinal bond.c. An increase in the volatility of rates will increase the value of the firm’s option to call back the Colina bond. If rates go down, the firm can call the bond, which puts a cap on possible capital gains. So, greater volatility makes the option to call back the bond more valuable to the issuer. This makes the bond less attractive to the investor.4. Market conversion value = Value if converted into stock = $28 = $Conversion premium = Bond price – Market conversion value= $ – $ = $5. a. The call feature requires the firm to offer a higher coupon (or higher promised yield to maturity) on the bond in order to pensate the investor for the firm39。s option to call back the bond at a specified price if interest rate falls sufficiently. Investors are willing to grant this valuable option to the issuer, but only for a price that reflects the possibility that the bond will be called. That price is the higher promised yield at which they are willing to buy the bond.b. The call feature reduces the expected life of the bond. If interest rates fall substantially so that the likelihood of a call increases, investors will treat the bond as if it will mature and be paid off at the call date, not at the stated maturity date. On the other hand, if rates rise, the bond must be paid off at the maturity date, not later. This asymmetry means that the expected life of the bond is less than the stated maturity.c. The advantage of a callable bond is the higher coupon (and higher promised yield to maturity) when the bond is issued. If the bond is never called, then an investor earns a higher realized pound yield on a callable bond issued at par than a noncallable bond issued at par on the same date. The disadvantage of the callable bond is the risk of call. If rates fall and the bond is called, then the investor receives the call price and then has to reinvest the proceeds at interest rates that are lower than the yield to maturity at which the bond originally was issued. In this event, the firm39。s savings in interest payments is the investor39。s loss.6. a. (iii)b. (iii) The yield to maturity on the callable bond must pensate the investor for the risk of call.Choice (i) is wrong because, although the owner of a callable bond receives a premium plus the principal in the event of a call, the interest rate at which he can reinvest will be low. The low interest rate that makes it profitable for the issuer to call the bond also makes it a bad deal for the bond’s holder.Choice (ii) is wrong because a bond is more apt to be called when interest rates are low. Only if rates are low will there be an interest saving for the issuer.c. (iii)d. (ii)1414Copyright 169。 2014 McGrawHill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGrawHill Educatio