1. What is the term structure of interest rates, and what is the yield curve? Describe and draw a normal yield curve and an inverted yield curve.

2. You are examining two bonds. Bond A is a 9.875% coupon semi-annual bond that matures in 20 years. Bond B is a 20 year zero-coupon bond. The yield to maturity for each bond is 7.50% and the par value for each is $1,000.

a) For each bond indicate if it is premium bond, discount bond, or par bond.

b) What is the current price of each bond?

c) Plot the price path for each bond from now until maturity.