In March this year, University of Michigan issued $1.2 billion century bonds (with 100-year maturity). Yes, universities do issue bonds. Assume that coupon rate was 5.28 and yield was also 5.28. The bond pays coupons semi-annually. A unit of the bonds has the par value of $1,000.

(1) What is the price of a unit of bonds at the issuance (P0)?

(2) An investor, who purchased one unit of bond at P0 above, is planning to sell the bonds in 10 years from now. The investor estimated the future interest rate that would prevail at T=10 and the selling price for a unit of bond was computed at $870 (P10 = $870). Further, this investor found that the coupon can be re-invested at 6% (annual rate) during this 10-year investment period, which has 20 payments.

a. What is the total payoff of the investor at T=10 (selling proceeds + value of coupons)? The investor holds one unit of bond (par = $1,000).

b. What is the expected annualized return for this investor? Since we have semi-annual payment, you need to compute r = {[Answer in a]/1,000}(1/20), and then provide (1+r)2 -1 as the final annualized return. Report your answer in terms of % up to 2nd decimal place.

(3) Do you think that U. Michigan should design the bonds to be callable? Why or why not? State briefly.

(4) Youre considering investing in this bonds. Can you make your cash flow stable over your investment horizon in spite of the fluctuations in interest rate in the market? Provide the strategy and describe briefly (No more than 2 sentences).