1. Answer each of the following (All subsections carry equal marks) a) A 1000-par value bond has a coupon rate of 6%. The bond has 8 years left to maturity and the market's required yield to maturity for similarly rated debt is 5%. What is the duration of the bond? If the maturity increases to 12 years, what would be the changes of duration? b) Suppose the nominal gilt yield curve looks like the one below, explain how the short-term interest rates are expected to change. What might the yield curve indicate about the inflation rate in the future? Yield to Maturity 05 35 10 15 20 25 30 Term to Maturity (Years) c) Explain with example(s) how the lemons problem could cause financial markets to fail. d) Suppose the risk-free return is 2.8% and the market portfolio has an expected return of 6.6% and a volatility (measured as standard deviation) of 14%. A stock has a 18% volatility and a correlation with the market of -0.3. Following the CAPM assumptions, calculate and explain the beta and the expected return of the stock