a)

What is a sinking fund provision? Consider two bonds, A and B, which are identical in every respect except that Bond A has a sinking fund and Bond B does not. Which bond would have the higher required rate of return (YTM)? 11.

b)

What is a convertible bond? Consider two bonds, A and B, which are identical in every respect except that Bond A is a convertible bond and Bond B does not have a conversion feature. Which bond would have the higher required rate of return (YTM)?

c)

What is a municipal bond? What tax advantage do they receive? a. An investor is choosing between two bonds: an AA-rated corporate bond with a yield to maturity (YTM) of 11.5% and an AA-rated municipal bond with a yield to maturity (YTM) of 8.5%. If the investor has a 40 percent marginal federal tax rate, which bond would provide a higher after-tax return if held to maturity? b. Compute the YTM for the corporate bond that make its after-tax return equal to the YTM for the municipal bond?