Ques 4: Sam Strother and Shawna Tibbs are vice-presidents of Mutual of Seattle Insurance Company and co-director of the company's pension fund management division. A major new client, the Northwestern Municipal Alliance, has requested that Mutual of Seattle present an investment seminar to the mayors of the represented cities, and Strother and Tibbs, who will make the actual presentation, have asked you to help them by answering the following questions. Because the Boeing Company operates in one of the league's cities, you are to work Boeing into the presentation. (Marks 07)

1) Enlist at least four key features of a bond?

2) What is the value of a 10-year, Rs.1,000 par value bond with a 10% annual coupon if cost of debt is 10%?

3) What would be the value of the bond described in part (2) if, just after it had been issued, the expected inflation rate rose by 3%, causing investors to require a 13% market interest rate? Would we now have a discount or a premium bond?

4) What would happen to the bonds' value calculated in part (2) if inflation fell, and market interest rate declined to 7%? Would we now have a premium or a discount bond?

5) What is the yield to maturity on a 10-year, 9% annual coupon, Rs.1,000 par value bond that sells for Rs.887.00? What does the fact that a bond sells at a discount or at a premium tell you about the relationship between the current interest rate and the bond's coupon rate?

6) What is the current yield, and the capital gains yield for the premium bond described in part (4)? (Assume the bond is held to maturity and the company does not default on the bond).

7) Suppose a 30-year, 14%, semiannual coupon bond with a par value of Rs.1,000 is currently selling for Rs.1,800, producing a yield to maturity of 12%. However, the bond can be called after 17 years for a price of Rs.900. What is the bond's yield to call (YTC)?