On May 30, 1999, Janice Kerr is considering one of the newly issued 10 year AAA corporate bonds shown in the following exhibit.
|
Description |
Coupon |
Price |
Callable |
Call Price |
|
Sentinal, due May 30, 2009 |
6.00% |
100 |
Noncallable |
NA |
|
Colina, due May 30, 2009 |
6.20% |
100 |
Currently callable |
102 |
a. Suppose that market interest rates decline by 100 basis points (i.e., 1%). Contrast the effect of this decline on the price of each bond.
b. Should Kerr prefer the Colina over the Sentinal bond when rates are expected to rise or to fall?
c. What would be the effect, if any, of an increase in the volatility of interest rates on the prices of each bond?