Yah Yah Corporations (YY) issues a bond that pays 10% semi-annual coupon, have a $1,000 face value, and mature in 10 years. If YY bonds are sold to yield 8%, what is the price of YY bond at the end of year 2.

If YY issue the same bond (same coupon rate, face value and maturity) with callable feature, would the price of YY bond be lower or higher? Explain.

Callable bond: A bond that the issuer has the option to redeem before it reaches its stated maturity, and it allows the issuing company to pay off the debt early.