bob live in the Miami area, where Tony has a successful cockroach termination practice. bob has built up a sizable investment portfolio and have always had a major portion of their investments in xed-income securities. They adhere to a fairly aggressive investment posture and actively go after both attractive current income and substantial capital gains. Assume that it is now 2016 and bob is currently evaluating two investment decisions: one involves an addition to their portfolio, the other a revision to it. They talk to their investment advisor, Manny Ribera, and nd two opportunities. The rst investment decision involves a short-term trading opportunity. In particular, bob has a chance to buy a 7.5%, 25-year bond that is currently priced at $852 to yield 9%; she feels that in two years the promised yield of the issue should drop to 8%. The second is a bond swap. bob hold some of Gina Beauty Corporation 7%, 2029 bonds that are currently priced at $785. They want to improve both current income and yield to maturity and are considering one of three issues as a possible swap candidate:

(a) Frank Lopez Cars, Inc., 7.5%, 2041, currently priced at $780; (b) Fly Pelican Fly Products of America, 6.5%, 2029, selling at $885; and (c) Emilio Rebenga Social Insurance, 8%, 2030, priced at $950. All of the swap candidates are of comparable quality and have comparable issue characteristics. (a) Regarding the short-term trading opportunity: i. What basic trading principle is involved in this situation? ii. If bob expectations are correct, what will the price of this bond be in two years? iii. What is the expected return on this investment? iv. Should this investment be made? Why?

(b) Regarding the bond swap opportunity: i. Compute the current yield and the promised yield (use semiannual compounding) for the bond the Montanas currently hold and for each of the three swap candidates. ii. Do any of the swap candidates provide better current income and/or current yield than the Gina Beauty Corporation bonds the Montanas now hold? If so, which one(s)? iii. Do you see any reason why Elvira should switch from her present bond holding into one of the other issues? If so, which swap candidate would be the best choice? Why?

*is required to use formulas and not excel*