1. Given the following bond: 30 years, 5.25% semiannual AAA corporate bond in its 10^thyear of issue. The current market interest rate is 4.75%.

• What is the current price of the bond?
• What would be the effect of a change in the market price of the bond if the market interest rate increased to 5%? Calculate the difference.
• If this bond was callable, what would be the effect on market price over a non-callable bond? Would the price be higher, or lower?
• If this bond was a sinking fund bond, what would be the effect on market price compared to a non-sinking fund bond? Would the price be higher, or lower? Explain.
• What the effect would be on these two investments if the Federal Reserve announces a raise in the interest rate of .5% (the Federal Funds rate actually); effective immediately.

2. Given disposition effects,

• How would changes in the interest rate for bonds be different than for any other investments? That is, would a bond buyer be more likely to hold or sell when interest rates move in the opposite direction than the bond investor expects.
• Do you believe callable bonds are more conducive to disposition effects than on bonds without the callable provision? Explain.