Question: Please give detailed me the solution of (a),(b),(c) of this problem. (AMS 318 book: Mathematical Interest Theory Second Edition)
Suppose that the Johnson family has the option of purchasing two bonds.
• Bond A is a $4000 10% 10 year bond paying annual coupons with redemption value $2000, which can be purchased at a premium for $3000.
• Bond B is a $4000 1% 10 year bond paying annual coupons with redemption value $6000, which can be purchased at a discount for $2000.
Suppose further that each bond is callable and has a lockout period of 5 years, after which a call option can be placed by the issuer at the end of years {6, 7, 8, 9} for call premium of $2000
(Problem 4). Discuss what considerations the investor should consider when investing in either bond. That is:
(a) Which bond has a higher APY?
(b) Is the bond with the higher APY more or less liquid?
(c) Which bond would you (as a financial advisor) suggest they purchase and why?