Masters Corp. issues two bonds with 20-year maturities. Both bonds are callable at $1,050. The...
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Masters Corp. issues two bonds with 20-year maturities. Both bonds are callable at $1,050. The first bond is issued at a deep discount with a coupon rate of 4% and a price of $580 to yield 8.4%. The second bond is issued at par value with a coupon rate of 8.75%.
- What is the yield to maturity of the par bond and why? Why is it higher than the yield of the discount bond?
- If you expect rates to fall substantially in the next two years, which bond would prefer to hold?
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