You may have seen time value of money problems before, but they form the foundation of many areas of finance including financial planning, capital budgeting, and valuation. It is essential to understand not just how to perform the calculations but also why they work and how changes to the variables such as time, payment frequency, or interest rate affect the results. One of the first types of securities that you might use time value of money to value are bonds. Bonds make up a large part of the financing source for companies and the investment portfolio of individuals and institutional funds.

1. At the time of the last referendum, Quebec provincial bonds carried a higher yield than comparable Ontario bonds because of investors' uncertainty about the political future of Quebec. Suppose you were an investment manager who thought the market was overplaying these fears. In particular, suppose you thought that yields on Quebec bonds would fall by 50 basis points. Which bonds would you buy or sell? Explain your reasoning. (10 marks)

2. A company is contemplating a long-term bond issue. It is debating whether or not to include a call provision. What are the benefits to the company from including a call provision? What are the costs? How do these answers change for a put provision? (10 marks)