1. Why are long-term bond prices usually more sensitive to interest rate risk changes than prices of short-term bonds?

2. What is the capital asset pricing model (CAPM) and arbitrage pricing theory (APT)? Explain clearly to differentiate the two.

3. A straight (a.k.a. bullet or vanilla) bond pays a 9% coupon, has an 18-year maturity, a par value of $1,000, and pays semiannual coupon payments.

a. Calculate the Bond price, Yield to Maturity and Holding-Period Return.

b. Your number one fan, 6-year-old Buddy Bear, has asked you to explain what each calculation means. No pressure but if you get it wrong, children are impressionable at an early age and are not likely to forget.