1. On March 22, 2013 Tenkiller Torque Technology (TTT) was taken private in a leveraged buyout financed in part by a $5 billion issue of Pay-in-Kind (PIK) zero-coupon bonds. TTT's outstanding PIK bonds are not scheduled to make any interest payments during the next ten years, providing the new management with a time window for increasing the firm's operating cash flow before being required to cover the full interest burden on the debt issued to finance the leveraged buyout. After ten years, on March 22, 2023, the PIK bonds will automatically convert to a 25-year bond having a 5 percent coupon rate and a March 22, 2048 maturity. The first coupon payment for the PIK bonds is scheduled to be paid on September 22, 2023. The face value of each bond is $1000. Assuming that the market currently requires a yield to maturity of 5 percent for TTT's PIK bonds:
a. determine the market price for the bonds as of March 22, 2013
b. assuming that the required yield to maturity for TTT's PIK bonds increases to 5.6 percent on March 22, 2014, determine the rate of return that would have been earned by an investor who purchased the PIK bonds on March 22, 2013 and sold the PIK bonds on March 22, 2014.