Fixed income securities provide investors with a steady stream of interest payments and a fixed payment at maturity, yet their price reflects current market values.

Nicholas Tashimi is the vice president of Providence Insurance Company and director of the company$$s pension fund management division. An important new client, the NY Municipal Alliance, has requested that Providence Insurance present an investment seminar to the mayors of the represented cities, with Tashimi making the actual presentation. Tashimi has asked you to help them by answering the following questions:

What are the key features of a bond?

What are call provisions and sinking fund provisions? Do these provisions make bonds more or less risky?

How does one determine the value of any asset whose value is based on expected future cash flows?

How is the value of a bond determined? What is the value of a $10-$year, $$1,000$ par value bond with a $10\%$ annual coupon if its required rate of return is $10\%$

What would be the value of the bond described in Part D if$,$ just after it had been issued, the expected inflation rate rose by $3$ percentage points, causing investors to require a $13\%$ return? Would we now have a discount or a premium bond?

What would happen to the bond$$s value if inflation fell and the return on debt $($Rd$)$ declined to $5\%?$ Would we now have a premium or a discount bond?

What would happen to the value of the $10-$year bond over time if the required rate of return remained at $13\%?$ If it remained at $7\%?($Hint: With a financial calculator, enter PMT$,$ I$/$YR$,$ FV$,$ and N$,$ and then change N to see what happens to the PV as the bond approaches maturity.$)$

Conclude how Tashimi should provide this information in layman$$s terms for the mayors.