Sam Strother and Shawna Tibbs are vice presidents of Mutual of Seattle Insurance Company and co-directors of the companys pension fund management division. An important new client, the North-Western 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 presentation, have asked you to help them by answering the following questions.

g. Suppose a 10 year 10% semiannual coupon bond with a par value of $1,000 is currently selling for $1,135.90, producing a nominal yield to maturity of 8%. However the bond can be called after 5 years for a price of $1,050.

(1) What is the bonds nominal yield to call (YTC)?

(2) If you bought this bond, do you think you would be more likely to earn the YTM or YTC? Why?

h. What is the interest rate (or price) risk? Which bond has more interest rate risk: a 1-year bond or a 10-year bond? Why?

i. What is reinvestment rate risk? Which bond has more reinvestment rate risk: a 1-year bond or a 10-year bond? Why?

j. Briefly describe bankruptcy law. If a firm were to default on its bonds, would the company be liquidated immediately? Would the bondholders be assured of receiving all of their promised payments?