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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?

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