Question: As part of your analysis of debt issued by ABC Corporation, you are asked to evaluate two of its bond issues, shown in the following table:

a) Using the duration and yield information in the table above, compare the price and yield behavior of two bonds under each of the following scenarios:

i) Strong economic recovery with rising inflation expectations.

ii) Economic recession with reduced inflation expectations.

b) Calculate the projected price change for bond B if its yield to maturity falls by 75 basis points.

c) Describe the shortcoming of analyzing bond A strictly to call or to maturity.

\begin{tabular}{lll} & Bond A (callable) & Bond B (noncallable) \\ \hline Maturity & 2015 & 2015 \\ Coupon & 11.50% & 7.25% \\ Current price & 125.75 & 100.00 \\ Yield to maturity & 7.70% & 7.25% \\ Modified duration to maturity & 6.20 & 6.80 \\ Call date & 2009 & \\ Call price & 105 & \\ Yield to call & 5.10% & \\ Modified duration to call & 3.10 & \end{tabular} \begin{tabular}{lll} & Bond A (callable) & Bond B (noncallable) \\ \hline Maturity & 2015 & 2015 \\ Coupon & 11.50% & 7.25% \\ Current price & 125.75 & 100.00 \\ Yield to maturity & 7.70% & 7.25% \\ Modified duration to maturity & 6.20 & 6.80 \\ Call date & 2009 & \\ Call price & 105 & \\ Yield to call & 5.10% & \\ Modified duration to call & 3.10 & \end{tabular}