Q#1:

The XYZ Co. has a series of $1,000 par value bonds outstanding. Each bond pays interest semi annually and carries a coupon rate of 7%. Some bonds are due in 3 years while others are due in 10 years. If the required rate of return on bonds is 10%, what is the current price of

1. a) The bonds with 3 years to maturity?

2. b) The bonds with 10 years to maturity?

3. c) Explain the relationship between the number of years until a bond matures and its price.

Q#2:

Thea Corp. has a $10 million bond obligation outstanding which it is considering refunding. The bonds were issued at 12% and the interest rates on similar bonds have declined to 9%. The bonds have 12 years of their 20-year maturity remaining. Thea will pay a call premium of 8% and will incur underwriting costs of $400,000 immediately. The company is in a 40% tax bracket. There is no overlap interest period. Should the old issue be refunded?