As part of your analysis of debt issued by Monticello Corporation, you are asked to
Evaluate two specific bond issues, shown in the table below.
Monticello Corporation Bond Information
Bond A (Callable)
Bond B (Non-callable)
Maturity
2010
Coupon
11.50%
7.25%
Current price
125.75
100.00
Yield to maturity
7.70%
Modified duration to maturity
6.20
6.80
Call date
2004
—
Call price
105
Yield to call
5.10%
Modified duration to call
3.10
a. Using the duration and yield information in the table, compare the price and yield behavior of the two bonds under each of the following two scenarios:
i. Strong economic recovery with rising inflation expectations.
ii. Economic recession with reduced inflation expectations.
b. Using the information in the table, calculate the projected price change for bond B if the yield-to-maturity for this bond falls by 75 basis points.
c. Describe the shortcoming of analyzing bond A strictly to call or to maturity.
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