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Case Problem 11.1 The Bond Investment Decisions of Dave and Marlene Carter

a. Regarding the short-term trading opportunity:

1. What basic trading principle is involved in this situation?

2. If Marlenes expectations are correct, what will the price of this bond be in two years?

3. What is the expected return on this investment?

4. Should this investment be made? Why?

b. Regarding the bond swap opportunity:

1. Compute the current yield and the promised yield (use semiannual compounding) for the bond the Carters currently hold and for each of the three swap candidates.

2. Do any of the swap candidates provide better current income and/or current yield than the Beta Corporation bonds the Carters now hold? If so, which one(s)?