1. A firm issues two bonds with 20-year maturities. Both are callable at $1,050. The first bond is issued at a deep discount to par with a coupon rate of 4% and a price of $580 to yield 8.4%. The second is issued at par with a coupon rate of 8.9%.
   1. What is the yield-to-maturity of the par bond?
   2. If you expect rates to fall substantially in the next 2 years, which bond would you prefer to hold?
   3. In what sense does the discount bond offer implicit call protection?
2. Two bonds have identical times to maturity and coupon rates. One is callable at 105 and the other is callable at 110 which bond should have a higher yield to maturity? Explain. (i.e. which bond should be selling at a lower price? Which call option is the issuing firm more likely to exercise?)