Instructions/Requirements--Complete the following computations/discussions. Where computations are required, you must show all your work. discussions/explanations are required, you must use complete sentences and provide complete explanations.

Following is current information about two outstanding bonds of two different corporations. The bonds are identical (i.e., they have the same features and provisions) except for their credit ratings. The face value of each bond is $1,000. Interest is paid semiannually on both bonds.

Bond Rating Coupon Rate Market Price Term to Maturity

A AAA 4.5% $1,102.40 10 years

B BBB 5.8 1,116.57 10 years

1. Using the information provided, complete the following:
   1. Compute the yield to maturity (YTM) for both bonds. Show and label the numbers you input into your calculator (i.e., indicate in which TVM key they are entered).
   2. Explain the reason the two bonds have different YTMs.
   3. If the corporation that issued Bond A wants to issue a new bond today to raise funds for expansion, what should be the coupon rate on the new bond. Explain why.
2. One year from today, what should be the market values of the two bonds under the following conditions? Show and label all your work.
   1. Their yields to maturity do not change.
   2. The expected inflation rate increases by 2 percent.
3. For part 2(A), compute current yield, the capital gains yield, and the total yield generated by the bond during the year.
4. Suppose Bond B is callable in five years at a call price equal to $1,105. What is the yield to call (YTC) on the bond? Show and label all your computations.