Question
An investor is considering one of the newly issued 10 year AAA corporate bonds shown in the following table: Description Coupon Price Callable Call Price
An investor is considering one of the newly issued 10 year AAA corporate bonds shown in the following table:
| Description | Coupon | Price | Callable | Call Price |
| XYZ | 6.00% | 100 | Non-callable | N/A |
| RST | 6.20% | 100 | Currently Callable | 102 |
A. Suppose that market interest rates decline by 100 basis points (1%). Contrast the effect of this decline on the price of each bond.
B. Should the investor prefer the RST bond to the XYZ bond when rates are expected to rise or to fall?
C. What would be the effect, if any, of an increase in the volatility of interest rates on the prices of each bond?
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