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You are the manager for the bond portfolio of a pension fund. The policies of the fund allow for the use of active strategies in managing the bond portfolio. It appears that the economic cycle is beginning to mature, inflation is expected to accelerate, and, in an effort to contain the economic expansion, central bank policy is moving toward constraint. For each of the situations below, state which one of the two bonds you would prefer. Briefly justify your answer in each case. Commonwealth Edison, 2 3/4% due in 2021, rated Baa, and priced at 81 to yield 7.2% to maturity; or Commonwealth Edison, 9 3/8 % due in 2021, rated Baa, and priced at 114 to yield 7.2% to maturity.

You are the manager for the bond portfolio of a pension fund. The policies of the fund allow for the use of active strategies in managing the bond portfolio. It appears that the economic cycle is beginning to mature, inflation is expected to accelerate, and, in an effort to contain the economic expansion, central bank policy is moving toward constraint. For each of the situations below, state which one of the two bonds you would prefer. Briefly justify your answer in each case. Texas Power and Light Co., 5 1/2% due in 2022, rated AAA, and priced at 85 to yield 8.1% to maturity; or Arizona Public Service Co., 5.45% due in 2022, rated A−, and priced at 80 to yield 9.1% to maturity.

As part of your analysis of debt issued by Monticello Corporation, you are asked to evaluate two specific bond issues, shown in the table below. $$ \begin{matrix} \text{ } & \text{Bond A (callable)} & \text{Bond B (noncallable)}\\ \text{Maturity} & \text{2022} & \text{2022}\\ \text{Coupon} & \text{11.50\\%} & \text{7.25\\%}\\ \text{Current price} & \text{125.75} & \text{100.00}\\ \text{Yield to maturity} & \text{7.70\\%} & \text{7.25\\%}\\ \text{Modified duration to maturity} & \text{6.20} & \text{6.80}\\ \text{Call date} & \text{2016} & \text{-}\\ \text{Call price} & \text{105} & \text{-}\\ \text{Yield to call} & \text{5.10\\%} & \text{-}\\ \text{Modified duration to call} & \text{3.10} & \text{-}\\ \end{matrix} $$ a. Using the duration and yield information in the table, compare the price and yield behavior of the two bonds under each of the following two scenarios: i. Strong economic recovery with rising inflation expectations. ii. Economic recession with reduced inflation expectations. b. Using the information in the table, calculate the projected price change for bond B if the yield-to-maturity for this bond falls by 75 basis points. c. Describe the shortcoming of analyzing bond A strictly to call or to maturity.