Your cousin graduated from the Mechanical Engineering department of METU last year and she started to work immediately. She has some savings and she is thinking about investing in some bonds. Unfortunately, she is not good at finance and she cannot decide on which bonds and stocks to invest in. She knows that you are taking Principles of Finance this semester thus she asks your opinion. Her friends suggested her three bonds issued by the same company; Monsters Inc. Assume today is July 1, 2023 Bond 1: A pure discount bond. This bond is a one-year bond with a $10,000 par value. The yield to maturity (YTM) of this bond is 6%. Bond 2: A 7.5% coupon bond with semi-annual coupon payments and a $1,000 par value. It has 10 years until maturity and selling for $1,035.53 in the market today. Bond 3: A callable bond. This is an 8.3% coupon bond with semi-annual coupon payments and a $1,000 par value. It has 10 years until maturity and the YTM of this bond is 8.3%.

a. Calculate the price of bond 1.

b. State what kind of bond the bond 2 is and calculate its YTM.

c. State the price of the bond 3.

d. You are reading financial news and learn that Bond 1 is selling for $9,200 and Bond 3 is selling for $1,100 in the market. Decide which bond(s) is a better investment opportunity for now and state why.

e. All of these bonds are issued by the same company but they have different YTMs. The YTM of the first bond is the lowest of all three. Furthermore, bond 2 and bond 3 are issued at the same time with the same time to maturity. Given all this, briefly discuss the reasons for differences in YTM of these three bonds issued by the same company.

f. Assume one year passed (today is July 1, 2024) and the YTM for the second bond becomes 8%. Calculate the price of bond 2 given its new YTM.

g.Calculate the current yield, capital gains yield and total return on Bond 2 on July 1, 2024.