Features of Bo-knows Enterprises Bond and Stock

Amount of debt issue                  $100 million                         Security                                    None

Date of issue                                      6/1/90                                      Sinking Fund       Annual, beginning 6/1/2000

Maturity                                              6/1/20                                      Call Provision     callable after 6/1/2015

Face Value                                          $1000                                       Call Price               102%

Annual Coupon                               9 %                                              Rating                      Moody’s Aa

Offer price                                          100%                                        Junior Note                           

a. At the time of its IPO, If the company were to issue a similar bond but without a sinking fund, should the coupon rate be the same or lower or higher? Briefly explain.

b. In March 2011, the yield of similar risk bonds was 7%, what was the price of this bond then?

c. In 2012, the yield on bonds of similar risk bonds decreased to 6%, what was the price of this bond then?

d. Suppose you purchased this bond in 2011 and sold it in 2012. Did you make a good investment? What is your return?