Dave and Marlene Carter live in the Boston area, where Dave has a successful orthodontics practice. Dave and Marlene have built up a sizable investment portfolio and have always had a major portion of their investments in fixed-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 2013 and Marlene is currently evaluating two investment decisions: one involves an addition to their portfolio, the other a revision to it.

The Carters first investment decision involves a short-term trading opportunity. In particular, Marlene 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. The Carters hold some Beta Corporation 7%, 2026 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) Dental Floss, Inc., 7.5%, 2038, currently priced at $780; (b) Root Canal Products of America, 6.5%, 2026, selling at $885; and (c) Kansas City Dental Insurance, 8%, 2027, priced at $950. All of the swap candidates are of comparable quality and have comparable issue characteristics.

Please assist in answering the following questions and provide all formulas/details:

A) Regarding the short-term opportunity:

1. IfMarlene'sexpectationsarecorrect,whatwillthepriceofthisbondbein2years?
2. Whatistheexpectedreturnonthisinvestment?
3. Shouldthisinvestmentbemade?Why?

B) Regarding the bond swap opportunity:

1. Computethecurrentyieldandthepromisedyield(usesemiannualcompounding)forthebondtheCarterscurrentlyholdandforeachofthe3swapcandidates.
2. Doanyoftheswapcandidatesprovidebettercurrentincomeand/orcurrentyieldthantheBetaCorporationbondstheCartersnowhold?Ifso,whichone(s)?
3. Do you see any reason why Marlene should switch from her present bond holding into one of the others issues? If so, which swap candidate would be the best choice? Why?