1.

A bond has a duration of 5. If the yield of maturity of the bond decreases by 1%, the bond price will change by:

A. + 5%

B. 5%

C. + 1%

D. 1%

E. None of the above

2.

GameShop Inc. bonds are selling at par value with a coupon rate of 10 percent. The bonds will mature in 15 years. Coupons are paid annually. If prevailing interest rate (of similar companies) decreases, then which of the following is correct?

I. coupon rate will decrease.

II. current yield will decrease.

III. yield to maturity will be lower than the coupon rate.

IV. market price of the bond will decrease.

A. I only

B. I and II only

C. II and III only

D. I, III and IV only

3. Mike purchased a bond today with a 15-year maturity and a yield to maturity (YTM) of 6%. The coupon rate is 10% and coupons are paid annually. The par value is $1,000. Mike is going to hold this bond for 2 years and sell the bond at the end of year 2. The bond's yield to maturity will change to 9% at the time when Mike sells the bond. Assume coupons can be reinvested in short term securities over the next 2 years at an annual rate of 12%. What is Mikes annual return on this bond investment?

A. 3.73%

B. 7.32%

C. + 6.20%

D. + 24.45%

E. None of the above