Masters Corp. issues two bonds with 20-year maturities. Both bonds are callable at $1,050. The first bond is issued at a deep discount with a coupon rate of 4% and a price of $580 to yield 8.4%. The second bond is issued at par value with a coupon rate of 8.75%.
Â a. What is the yield to maturity of the par bond? Why is it higher than the yield of the discount bond?
Â b. If you expect rates to fall substantially in the next two years, which bond would you prefer to hold?
Â c. In what sense does the discount bond offer â€œimplicit call protectionâ€?