Western Money Management Inc. Bond Valuation Robert Black and Carol Alvarez are vice presidents of Western Money Management and codirectors of the company’s pension fund management division. A major new client, the California League of Cities, has requested that Western present an investment seminar to the mayors of the represented cities. Black and Alvarez, who will make the presentation, have asked you to help them by answering the following questions. A. What are a bond’s key features? B. What are call provisions and sinking fund provisions? Do these provisions make bonds more or less risky? C. How is the value of any asset whose value is based on expected future cash flows determined? D. How is a bond’s value determined? What is the value of a 10-year, $1,000 par value bond with a 10% annual coupon if its required return is 10%? E. (1) What is the value of a 13% coupon bond that is otherwise identical to the bond described in Part D? Would we now have a discount or a premium bond? E. (2) What is the value of a 7% coupon bond with these characteristics? Would we now have a discount or a premium bond? E. (3) What would happen to the values of the 7%, 10%, and 13% coupon bonds over time if the required return remained at 10%? (Hint: With a financial calculator, enter PMT, I/YR, FV, and N; then change (override) N to see what happens to the PV as it approaches maturity.) F. (1) What is the yield to maturity on a 10-year, 9%, annual coupon, $1,000 par value bond that sells for $887.00? That sells for $1,134.20? What does the fact that it sells at a discount or at a premium tell you about the relationship between rd and the coupon rate? G. What is interest rate (or price) risk? Which has more interest rate risk, an annual payment 1-year bond or a 10-year bond? Why? H. What is reinvestment rate risk? Which has more reinvestment rate risk, a 1-year bond or a 10-year bond?