13. As part of your analysis of debt issued by Monticello Corporation, you are asked to evaluate two of its bond issues, shown in the following table.

Bond A

(Callable)

Bond B

(Noncallable)

Maturity 2020 2020 Coupon 11.50% 7.25%

Current price 125.75 100.00 Yield to maturity 7.70% 7.25%

Modified duration to maturity 6.20 6.80 Call date 2014 —

Call price 105 —

Yield to call 5.10% —

Modified duration to call 3.10 —

a. Using the duration and yield information in the table above, compare the price and yield behavior of the two bonds under each of the following two scenarios:

i. Strong economic recovery with rising inflation expectations.

ii. Economic recession with reduced inflation expectations.

b. Using the information in the table, calculate the projected price change for bond B if its yield to maturity falls by 75 basis points.

c. Describe the shortcoming of analyzing bond A strictly to call or to maturity.