1. XYZ Inc. sold $5,000,000 of 7.5%, 25-year, semiannual payment bonds 20 years ago. The bonds are not callable, but they do have a sinking fund provision requiring 10% of the original face value to be redeemed each year ($500,000), beginning in Year 15. To date, 50% of the issue has been retired. The company can either call bonds at par for sinking fund purposes or purchase bonds on the open market, spending sufficient money to redeem 10% of the original face value each year. If the nominal yield to maturity on the bonds is currently 8.25%, what is the least amount of money XYZ Inc. must put up to satisfy the sinking fund provision? (3 points)

2. Consider a portfolio that includes the following four bonds: Bond Coupon Rate Years to Maturity Par Value Yield to Maturity A 2.50% 4 $10,000,000 2.25% B 4.50% 6 $15,500,000 5.25% C 7.75% 8 $20,000,000 8.00% D 8.50% 10 $35,000,000 8.25%

(1) Assuming semiannual compounding, calculate the market value of each individual bond (Bond A, Bond B, Bond C, and Bond D). What is the market value of the portfolio? (2 points) (2) What is the yield for the portfolio? (4 point) Hint: It may be more efficient that you solve this problem in an excel spreadsheet.

3. Suppose that an investor with a 5-year investment horizon is considering purchasing a 7-year 9% coupon bond selling at par. The investor expects that he can reinvest the coupon payments at an annual interest rate of 9.4% and that at the end of the investment horizon 2-year bonds will be selling to offer a yield to maturity of 11.2%. Assuming semiannual compounding, what is the total return for this bond? (6 points)