finance help please

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Evaluate the following substitution swap: You currently hold a 25-year, 9.0% coupon bond priced to yield 10.5%. As a swap candidate, you are considering a 25-year Aa-rated. 9.0% coupon bond priced to yield 10.75%. (Assume a one year work out period and reinvestment at 10.5%).
 
logicblue said:
Evaluate the following substitution swap: You currently hold a 25-year, 9.0% coupon bond priced to yield 10.5%. As a swap candidate, you are considering a 25-year Aa-rated. 9.0% coupon bond priced to yield 10.75%. (Assume a one year work out period and reinvestment at 10.5%).

I at least cannot help because I do not even begin to understand the question. You have two bonds with the same coupon (9%) and the same term remaining to maturity (25 years) but with different yields to maturity. As a real world problem, there must be something different about the bonds to warrant the difference in yield. If it is a risk differential, does the problem say anything about risk/return trade-offs or give a utility function for risk and yield? I am totally lost by the work-out period. What is there to work out if both bonds are current? If you sell the lower yielding bond (meaning the higher-priced one) to buy a bond yielding 10.75%, why is the reinvestment rate 10.5%, or is there a budget constraint involved? Or is the 10.5% the rate at which bond coupons are assumed to be reinvested?

If my questions are idiotic, just ignore them.
 
Show your work please.
You were told this at your 1st post...
 
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