Examine the tombstone announcing the issue of State of Hawaii general obligation bonds (page 5). All of these bonds are being issued in 1983. However, their maturities vary from 3 years to 20 years. All bonds pay interest semi-annually.
A) Examine Bond A (maturing in 1991). This bond will be issued at 102.33% of face value.
1. What is the yield to maturity for Bond A?
2. What effective annual rate of return will Bond A earn (if held to maturity)?
3. Identify three features of Bond A that might make it attractive to potential investors.
B) Examine Bond B (maturing in 2001).
1. At what price will Bond B be issued?
2. Bond A vs. Bond B. Although both of these bonds are obligations of the State of Hawaii, their yields differ substantially. Identify two reasons for this differential.