1. You have a coupon bond that has 30 years to maturity. You want to split the coupons and Principal and sell these two assets to your investors. We will call the asset with all the coupons as C-Strip and the asset with Principal as P-Strip.

a. Between C-Strip and P-Strip which will be priced higher if all the payments are from the bond? Why?

b. Suppose you purchase multiple bonds of the same kind and make the PV of C-Strips and P-Strips to be equal. If interest rate changes, which will be more sensitive in terms of value change? Why?

2. Suppose there are two different kinds of bonds on the market: Old and New bonds. Both bonds are issued by the same company and have identical coupons, principal, and the same initial maturity (both 30-year bonds). The Old bonds were issued 10 years ago and the New bonds were just issued. If you are expecting that the market interest rate will fall very soon. Which bond will be more attractive for you if you are to sell the bond shortly?

3. Suppose there are two different kinds of bonds on the market: High-C and LowC bonds. Both bonds are issued by the same company and have identical principal, and the same initial maturity (both 30-year bonds). The High-C bonds were just issued with a high coupon rate and the Low-C bonds were just issued with a low coupon rates. If you are expecting that the market interest rate will fall very soon. Which bond will be more attractive for you if you are to sell the bond shortly?

4. Suppose there are two different kinds of bonds on the market: High-Y and LowY bonds. Both bonds are issued by the same company and have identical coupons, principal, and the same initial maturity (both 30-year bonds). The High-Y bonds were just issued in a country A that has high interest rate and the Low-Y bonds were just issued in a country B that has low interest rate. If you are expecting that the market interest rate will fall very soon. Which bond will be more attractive for you if you are to sell the bond shortly?

5. Interest rates often reflect how the economy is doing (high interest rates may reflect high growth rate). Suppose that there is a convertible bond outstanding on the market. When do you think it will be converted into stock more frequently 1) when interest rate goes up vs. 2) when interest rate goes down.