1. You are considering investing in a BBB-rated corporate bond with a 10-year maturity and a 5% coupon rate (with annual coupons). Assuming that the bond rating is appropriate given the default risk of the company, that the risk free rate is 3% and the default spread for BBB rated corporate bonds is 2.5%, which of the following would you expect to see as the price of the bond?

a. The bond should trade at face value b. The bond should trade at a premium over face value c. The bond should trade at a discount on face value d. Impossible to tell without more information

2. Assume that you buy a default free government bond with a coupon rate of 2% and a maturity of 20 years, at face value. Assuming that interest rates increase to 3% over the course of the year following your purchase. What will your return on the government bond be for that year?

3. The duration of a bond measures its interest rate sensitivity, with higher duration reflecting more sensitivity to interest rate changes. Which of the following bonds has the lowest duration?

a. A 10-year, 5% coupon bond b. A 20-year, 5% coupon bond

c. A 10-year, 2% coupon bond d. A 20-year. 2% coupon bond