1. Which of the following statement is correct?

Relative to the price of a long term bond, the price of a short-term bond is more sensitive to the change in interest rate.

Interest rate risk of a short-term bond is higher than the interest rate risk of a long-term bond.

Interest rate risk of a short-term bond is higher than the interest rate risk of a long-term bond.

It is possible that the price of a Zero-coupon is larger that its face value.

Bond price would be lower if the default risk of the bond issuer increases.

2. A particular asset has a beta of 1.2 and an expected return of 15%. The expected return on the market portfolio is 13% and the risk-free asset is 5%. Which of the following statements are correct?

I. This asset line on the security market line.

II. This asset line above the security maket line.

III. This asset line below the security maket line.

IV. This asset is underpriced.

I only

II only

III and IV

II and IV

None