Mr. A Sharma is vice president of N Metal Works Inc. The company is considering issuing bonds to satisfy part of its financing need for a new venture of Steel Plant, which is going to be launched in Mid-Western Region of Ontario. He knows that Canadian Financial Market is sensitive to the price and terms and condition of bond issue. As a result of this fact, he is reluctant to entertain with new issue. As a financial consultant, he is seeking your help on certain issues associated with bond contract features, price, and yields. You are required to address the following issues on behalf of Mr. Sharma.

What are the key features of a bond?

What are call provisions and sinking fund provisions? Do these provisions make bonds risky?

How is the value of a bond determined? What is the value of a 10-year, $ 1,000 par value bond with a 10 percent annual coupon if its required rate of return is 10 percent?

What would be the value of the bond described in part 'c' if, just after it had been issued, the expected inflation rate rose by 3 percentage points, causing investors to require a 13 percent return? Would we now have a discount or a premium bond?

What would happen to the bonds value if inflation fell and declined to 7 percent? Would we now have a premium or a discount bond?

What would happen to the value of the 10-year bond over time if the required rate of return remained (i) at 13 percent, (ii) at 7 percent?

What is the yield to maturity on a 10-year, 9 percent, annual coupon, $ 1,000 par value bond that sells for $ 887? That sells for $ 1,134.20. What does the fact that bond sells at discount or at a premium?