1. Please mark the following as either True or False a. ___Target date immunization is the idea that you set the duration of your portfolio (of fixed income securities) equal to the holding maturity of your liability. Therefore, even if interest rates change (slightly), you will still be able to fully fund your liabilities.

b. ___The most often used duration, as discussed in the class, is actually called Macaulays duration. It is the simple average of the times to each coupon or principal payment.

c. ___Because nominal interest rates of Treasury Inflation Protected Securities (TIPS) are periodically adjusted for inflation, their real rates are always positive.

d. ___High profitability ratio and high leverage ratio are signals of low bond default risk.

e. __True__ The yield curve is a good predictor of the business cycle because long term rates tend to rise in anticipation of economic expansion.

f. True____A rising yield curve must imply expectation of higher future interest rates.

g. __True__Other factors held constant, duration of a bond increases with time to maturity except for very high premium bonds.

h. False___At a 10% yield, the duration of a perpetuity that pays $50 dollars every six months forever, is 11 years. The value would be 1000 or 10 years

i. _False__If a bond is held to maturity, its yield to maturity is higher than the hold period return on the bond. If held to maturity both will have earned the same return.

j. ___A credit default swap (CDS) is in effect an insurance policy on the default risk of a bond or loan. Therefore, it is cheaper to buy CDS in economic downturns when interest rates tend to be low.