Annie Hegg has been considering investing in the bonds of Atilier Industries. The bonds were issued 5 years ago at their

$1,000 par value and have exactly25 years remaining until they mature. They have an 8.0% coupon interest rate, are convertible into

50 shares of common stock, and can be called any time at $1,080.00. The bond is rated Aa by Moody's. Atilier Industries, a manufacturer of sporting goods, recently acquired a smallathletic-wear company that was in financial distress. As a result of the acquisition, Moody's and other rating agencies are considering a rating change for Atilier bonds. Recent economic data suggest that expected inflation, currently at 5.0% annually, is likely to increase to a

6.0% annual rate.

Annie remains interested in the Atilier bond but is concerned about inflation, a potential rating change, and maturity risk. To get a feel for the potential impact of these factors on the bondvalue, she decided to apply the valuation techniques she learned in her finance course.

f. If Annie buys the bond today at its

$1,000 par value and holds it for exactly

3 years, at which time the required return is

7.0%, how much of a gain or loss will she experience in the value of the bond (ignoring interest already received and assuming annual interest)?

g. Rework part (f), assuming that Annie holds the bond for

10 years and sells it when the required return is

7.0%. Compare your finding to that in part(f), and comment on the bond's maturity risk.

h. Assume that Annie buys the bond at its current price of

$983.80 and holds it until maturity. What will her current yield and yield to maturity (YTM) be, assuming annual interest?

i. After evaluating all of the issues raisedabove, what recommendation would you give Annie with regard to her proposed investment in the Atilier Industries bonds?