Kauffman has bonds outstanding with a face value of $1,000 and 10 years left until maturity. They have an 11% annual coupon payment, and their current price is $1,175.

A. What is the yield to maturity?

B. What is the yield to call AND the yield to maturity if they are called in 5 years, 6 years, 7 years and 9 years? Prepare in excel for (a, b and d).

C. Which yield might investors expect to earn on the bonds? Why?

D. The bond's indenture that the call provision gives the firm the right to call the bonds at the end of each year beginning in year 5. In year 5, the bonds may be called at 109% of face value; but in each of the 4 years, the call percentage will decline by 1%. Thus, in year 6, they may be called at 108% of face value; in year 7 they may be called at 107% of face value; and so forth. If the yield curve is horizontal and interest rates remain at their current level, when is the latest that investors might expect the firm to call the bonds?

1. Explain with detailed explanation of the conclusion reached concerning whether or not to call the bond before maturity.

2. If your recommendation is to call the bond early, explain when to call the bond and rationale.

3. Discuss the advantages and disadvantages of using a long term loan instead of a bond.