1. XYZ Corporation issued 20-year, noncallable, 6.5% annual coupon bonds at their par value of $1,000 one year ago. Today, the market interest rate on these bonds is 5.0%. What is the current price of the bonds, given that they now have 18 years to maturity? Show work, 2 decimals.

2. Your friend tells you that he wrote down in his notes in his finance class, that "a call provision gives bondholders the right to demand, or "call for," repayment of a bond. Typically, companies call bonds if interest rates rise and do not call them if interest rates decline." Are his notes correct? Explain.

3. You overhear two of your friends having a friendly argument on a topic you just covered in class.

Your friend A says: Convertible bonds and bonds with warrants must have higher coupon rates than straight bonds that have similar ratings, as investors may lose income stream if bonds are converted.

Your friend B retorts; You are wrong. I read the opposite somewhere. Convertible bonds and bonds with warrants have lower coupon rates than straight bonds that have similar ratings.

• Who is correct and why?