Maurice Tutor

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    Argosy University/ Phoniex University/
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    Oct-2001 - Nov-2016

Category > Management Posted 12 Oct 2017 My Price 7.00

Alessandra Burke

16.       On May 30, 2011, Alessandra Burke is considering purchasing one of the newly issued 10-year AAA corporate bonds shown in the following exhibit. Alessandra notes that the yield curve is currently flat and assumes that the yield curve shifts in an instantaneous  and parallel  manner.

BOND  CHARACTERISTICS

Description

Coupon

Price

Callable

Call Price

Sophie due May 30, 2021

6.00%

100.00

Noncallable

Not applicable

Celeste due May 30, 2021

6.20%

100.00

Currently callable

102.00

a.    Contrast the effect on the price of both bonds if yields decline more than 100 basis points. (No calculation is  required).

b.    State and explain under which two interest rate forecasts Alessandra would prefer the Celeste bond over the Sophie  bond.

c.    State the directional price change, if any, assuming interest rate volatility increases,

for each of the following:

(1)  The Sophie bond

(2)  The Celeste bond

 

Answers

Maurice Tutor
(5)
Status NEW Posted 12 Oct 2017 09:10 PM My Price 7.00

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