These two bonds were issued five years ago, with terms given in the following table:

ABC Bonds XYZ Bonds Issue size $1.2 billion $150 million Maturity 10 years* 20 years Coupon 6% 7%

Collateral First mortgage General debenture Callable Not callable In 10 years Call price None 110 Sinking fund None Starting in 5 years

*Bond is extendible at the discretion of the bondholder for an additional 10 years.

6% Coupon Floating-Rate Issue size $250 million $280 million Original maturity 20 years 15 years Current price (% of par) 93 98 Current coupon 6% 4%

Coupon adjusts Fixed coupon Every year Coupon reset rule — 1-year T-bill rate + 2%

Callable 10 years after issue 10 years after issue Call price 106 102.50 Sinking fund None None Yield to maturity 6.9% —

Price range since issued $85–$112 $97–$102

a. Why is the price range greater for the 6% coupon bond than the floating-rate bond?

b. What factors could explain why the floating-rate bond is not always sold at par value?

c. Why is the call price for the floating-rate bond not of great importance to investors?

d. Is the probability of a call for the fixed-rate bond high or low?

e. If the firm were to issue a fixed-rate bond with a 15-year maturity, what coupon rate would it need to offer to issue the bond at par value?

f. Why is an entry for yield to maturity for the floating-rate bond not appropriate? P-69