Case Study:
1. Mrs. Smith, a retired woman wants to invest some money from her retirement fund into bonds. Explain why bonds are a good investment for her as compared to shares.
2. XYZ Company is considering issuing bonds. The finance manager is thinking of adding a call provision to the bonds. But he is confused whether to do that or not as he doesn't understand bond mechanics.
As a consultant advise the manager and explain to him the following:
What is interest rate (or price) risk? Which bond has more interest rate risk, an annual payment 1-year bond or a 10-year bond? Why?
Who gains from a call option? In what situation? What can we say about the prices and yields of two identical bonds if has a call option and the other has not?
Will it be better if XYZ considers sinking fund provision? Explain.
word count:500