As part of your analysis of debt issued by Monticello Corporation, you are asked to evaluate two specic bond issues, shown in the table below.

Monticello Corporation Bond Information Bond A (callable)Bond B (noncallable)

Maturity20132013

Coupon11.50%7.25%

Current price125.75100.00

Yield to maturity7.70%7.25%

Modified duration to maturity6.206.80

Call date2007

Call price105

Yield to call5.10%

Modified duration to call3.10

a.Using the duration and yield information in the table, compare the price and yield behavior of the two bonds under each of the following two scenarios:

i.Strong economic recovery with rising ination expectations.

ii.Economic recession with reduced ination expectations.

b.Using the information in the table, calculate the projected price change for bond B if the yield-to-maturity for this bond falls by 75 basis points.

c.Describe the shortcoming of analyzing bond A strictly to call or to maturity.