1. Lily manages a bond portfolio and believes that market interest rates are going to increase over the next several months. Accordingly, she should:

I. Reduce the average maturity of the portfolio by selling long-term bonds and buying short-term bonds.

II. Lengthen the average maturity of the portfolio by buying long-term bonds and selling short-term bonds.

III. Reduce the average coupon rate by selling high-coupon bonds and buying low-coupon bonds.

IV. Increase the average coupon rate by buying high-coupon bonds and selling low-coupon bonds.

A. II only

B. III only

C. I and III only

D. I and IV only

E. II and III only

2. Suppose a firm uses a constant WACC in determining the value of capital budgeting projects rather than using the security market line. The firm will tend to _________.

I. accept profitable, low risk projects

II. accept unprofitable, high risk projects

III. reject profitable, low risk projects

IV. reject unprofitable, high risk projects

A. II only

B. III only

C. I and IV only

D. II and III only

E. III and IV only