Provide correct answers to the questions in the attched document.

On May 30, 2011, Alessandra Burke is considering purchasing one of the newly issued 10-year AAA corporate bonds shown in the following exhibit. Alessandra notes that the yield curve is currently flat and assumes that the yield curve shifts in an instantaneous and parallel manner. BOND CHARACTERISTICS Description Sophie due May 30, 2021 Celeste due May 30, 2021 Coupon 6.00% 6.20% Price 100.00 100.00 Callable Noncallable Call Price Not applicable Currently callable 102.00 A. B. c. Contrast the effect on the price of both bonds if yields decline more than 100 basis points. (5 marks) (No calculation required). State the directional price change, if any, assuming interest rate volatility increases, for each of the following: (I) The Sophie bond (2) The Celeste bond (5 marks) There are several institutional participants in the bond market, choose two and state what type of bond each is likely to purchase and why. (6 marks) JZJ Inc. is considering the purchase of one of the two bonds described in the following table. The analyst at JZJ realizes the decision will depend primarily on effective duration, and she believes that interest rates will increase by 115 basis points at all maturities over the next six months. BOND DESCRIPTIONS Characteristic Market price Maturity date Call date Annual coupon Interest payment Effective duration Yield to maturity Credit rating EBR 101.75 June 1, 2027 Noncallable 6.25% Semiannual 7.15 6.02% CRR 101.75 June 1, 2022 June 1, 2017 7.35% Semiannual 5.60 7.10% D. E. Calculate the price change and subsequent price forecasted by effective duration for both the EBR and CRR bonds if interest rates increase by 115 basis points over the next six (6 marks) months. Show your work. Without specifically knowing the effective duration of the bonds, discuss three reasons why you would choose either the EBR or CRR bond, given you expect interest rates to increase. (6 marks)