1. Suppose you purchased a bond with a 5% annual coupon payment that expires in 10. Two years later the risk-free rate is 7%. Have you been exposed to interest rate risk? Have you been exposed reinvestment risk? Briefly explain why and what interest and reinvestment risk are.

2. Assuming all other bond characteristics are identical which bond would pay a higher coupon payment? Very briefly explain why.

a. A callable bond or a convertible bond

b. A bond with negative covenants vs a bond without negative covenants

c. A Treasury Strip or a regular Treasury bond

d. A secured vs unsecured bond

3. A coupon bond pays interest semi-annually, matures in 30 years, has coupon rate of 4% and is currently selling for $700. What is the annual YTM? Show your work.

4. A semi-annual step-up bond matures in 11 years and pays zero coupon payments for the first 5 years. During the remaining life of the bond it pays a 5% coupon payment. If the bond has a YTM of 8% what is the current price of the bond? Show your work.

5. Why are money markets needed in addition to banks? What cost advantages do the money markets provide?

6. Briefly describe the main differences between the following money market securities:

a. Repurchase agreements and federal funds

b. Commercial paper and treasury bills