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solution

Sam Strother and Shawna Tibbs are vice presidents of Mutual of
Seattle Insurance Company and codirectors of the company’s pension
fund management division. An important new client, the
North-Western Municipal Alliance, has requested that Mutual of
Seattle present an investment seminar to the mayors of the
represented cities, and Strother and Tibbs, who will make the
actual presentation, have asked you to help them by answering the
following questions. Because the Boeing Company operates in one of
the league’s cities, you are to work Boeing into the
Presentation.

a. What are the key features of a bond?

c. How is the value of any asset whose value is based on
expected future cash flows determined?

d. How is the value of a bond determined? What is the value of a
10-year, $1,000 par value bond with a 10% annual coupon if its
required rate of return is 10%?

e. (1) What would be the value of the bond described in part d
if, causing investors to require a 13% return? Would we now have a
discount or a premium bond?

(2) What would happen to the bond’s value if inflation fell, and
rd declined to 7%? Would we now have a premium or a
discount bond?

(3) What would happen to the value of the 10-year bond over time
if the required rate of return remained at 13%, or if it remained
at 7%?

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