Please answer all parts of the question clearly and show the steps for calculation.

Question 1

The table below shows the terms of Xcel Telecoms Ltd bonds. Both bonds were issued 10 years ago.

Floating Rate Note 7% Fixed Rate Note

Issue size $200 million $200 million

Original maturity 30 years 20 years

Current price 99 95

Current Coupon 6% (rate resets yearly) 7%

Call Protection 1st 10 years 1st 10

Call Price 103 105

Yield to maturity -- 8%

Price range since issue $97 to $102 $88 to $110

(a) Discuss why the price range of the floating rate note is narrower than the price range of the fixed rate note.

(b) Explain why the price of the floating rate note is seldom the par value?

(c) Explain why the floating rate note investor would not care much about the call price?

(d) Evaluate the probability of a call for the fixed-rate note. Is it high or low?