1. Suppose you buy a 20-year, 7.5% (semiannual payment) coupon bond for $1,099 when its yield to maturity is 6.60% and plan to hold it for 15 years. You forecast that the bond's yield to maturity will be 8% when it is sold and that the reinvestment rate on the coupons will be 6.40%.

1.1) What is the expected bond's sales price at the end of the investment horizon?

a. $1,035.61

b. $1,042.93

c. $979.72

d. $959.24

e. $923.57

1.2) What is the realized rate of return at the end of your investment horizon?

a. 7.50%

b. 7.12%

c. 5.84%

d. 6.39%

e. 6.65%

2. Consider the following $1,000 par value zero coupon bonds:

Bond Maturity (years) YTM (%)

A 1 4%

B 2 4.5%

C 3 5%

D 4 6.5%

2.1) Assuming that the expectations hypothesis is valid, what is the expected price of Bond C at the end of the first year?

a. 845.61

b. $925.45

c. $1,034. 56

d. $1,015.69

e. $898.39

2.2) Assuming that the liquidity preference theory is valid and the liquidity premium is 1.2%, what is the expected price of Bond D at the end of the second year?

a. $852.73

b. $841.52

c. 836. 74

d. $867. 95

e. $899.41

2.3) An 7% coupon bond ($1,000 face value) pays coupons annually and will mature in 2 years. What should the yield to maturity on the bond be?

a. 4.48%

b. 5.62%

c. 7.60%

d. 6.16%

e. 3.94%