#1.

Part A.

If market interest rates decline,

		Short-term bonds will increase in value more than long-term bonds.
		Long-term bonds will decrease in value more than short-term bonds.
		Long-term bonds will increase in value more than short-term bonds.
		Short-term bonds will decrease in value more than long-term bonds.

Part B.

ABC Corporation has $100 million of 5% coupon bonds which mature in 16 years. The bonds were issued four years ago at par and are callable at 105% of par beginning next year. The bonds currently sell at a discount to par. Which one of the following situations would increase the likelihood that ABC would call its outstanding callable bonds?

		A report by the Federal Reserve that predicts higher US Gross Domestic Product and further reductions in the unemployment rate in the next 12 months.
		A general decline in the expected rate of inflation in the economy over the next five years.
		A Wall Street Journal article that cited sluggish sales and reduced profits at the firm in recent months.
		An increase in the firm's default risk.

Part C.

Match the yield to maturity to the terms of the bond. All of these bonds pay interest twice a year.

- A. B. C. D. E.	"A $1,000 par value bond that matures in 18 years is currently selling for $1,050.99. The bond pays $60.00 of interest every six months."
- A. B. C. D. E.	"A $1,000 par value bond that matures in 11 years is currently selling for $1,241.05. The bond pays $57.00 of interest every six months."
- A. B. C. D. E.	"A $1,000 par value bond that matures in 16 years is currently selling for $990.42. The bond pays $65.00 of interest every six months."
- A. B. C. D. E.	"A $1,000 par value bond that matures in 7 years is currently selling for $1,118.40. The bond pays $33.00 every six months."
- A. B. C. D. E.	"A $1,000 par value bond that matures in 14 years is currently selling for $1,073.63. The bond pays $30.00 of interest every six months."

A.	13.14%
B.	5.25%
C.	4.60%
D.	8.06%
E.	11.33%