3) Janice Kerrman is considering two 10-year AAA corporate bonds:

Sentinel bond is a noncallable 4% coupon bond priced at $100

Colina bond is a 4.5% coupon bond priced at $100 callable at a price of $102. Both bonds pay coupons semiannually.

a) Suppose market rates decline by 1%. Contrast the effect of this decline on the price of each bond. (15 Pts)

b) Which bond should Kerrman prefer if rates are expected to rise or fall? (10 Pts)