1. Some measures of equivalence are easy: for example, Go-Bots are not nearly as good as Transformers. Go-Bots kind of suck. This question asks you to examine the equivalent yield for debt instruments. An investor in the 35% income tax bracket may purchase a corporate bond that is rated AA and yields 9%. The investor may also buy an AA-rated municipal bond with a yield of 5.85%. Which bond would be preferred and why?

2. Lets stick with the theme of things that can change from one thing to another. Ke$ha decides to invest in that glitter factory she has been eyeing since the last section of the course. However, she is confused as to whether she should invest in the glitter companys common stock or bonds (among other things that confuse her which are not entirely appropriate for this forum). You do some research for her, and it turns out that the company offers a convertible bond with the following features (P.S. Ke$ha is pretty sure that she is buying a car covered in glitter at this point):

Coupon = 6%, Exercise Price = $25, Maturity = 20 years, Call Price = $1040, Price of the Common Stock = $30

1. Assuming this bond is nonconvertible, what would be its approximate value if comparable rates were 12%?
2. Into how many shares can the bond be converted?
3. What is the value of the bond in terms of stock (conversion value)?
4. What is the current minimum price that the bond will command?
5. If the current market price of the bond is $976, what should you do?

3. Lets take a breather with a short question that is relatively easy. Due to the structure of zero coupon bonds as debt instruments, the duration will always be ____________ the years to maturity.

1. Greater than
2. Less than
3. Equal to