3. The yield to maturity on a 1 year discount bond with a $1,000 face value and $973 price is? A. 2.77% B. 2.70% C. 3.70% D. 1.39%

4. The one-year interest rate over the next three years is expected to be 5.00%, 7.00% 10.00%. The liquidity premium for one- to three-year bonds: 0%, 0.25%, 0.75%. What is the interest rate on the three year bond? A. 7.75% B. 8.33% C. 8.08% D. 7.67%

5. The current one year interest rate is 5.00% on a T-bill. The current two year interest is 7.00% on the T-note. What is the market predicting about the interest rate on a one year bond in year 2(one year from now) solely based on the expectations theory? A. 6.00% B. 7.75% C. 9.00% D. 12.00%

6. Based on Table 1 which issue (s) has (have) an error in the reported prices. Table 1 Issue Coupon Maturity Yield Price A 7.00% 16 8.00% 104.02 B 7.00% 4 3.02% 99.14 C 5.00% 10 3.00% 102.5 D 5.50% 20 3.00% 104.15 A. A B. B C. C D. D E. A and B

13. A 10-year, 9.00% coupon bond with a face value of $1,000 is currently selling for $900. Compute your rate of return if you sell the bond next year for $936. A. 4.00% B. 14.00% C. 11.11% D. 16.45%

18. Based on Table 3, what is the liquidity risk premium? Table 3 Investment Maturity Liquidity Default Risk Interest Rate 1 2 High Low 2.00% 2 2 Low Low 2.52% 3 7 Low Low 3.52% 4 8 High Low 4.03% 5 8 Low High 5.53% A. 1.50% B. 1.52% C. 2.26% D. 0.52%

19. Based on Table 3, what is the default risk premium? A. 0.51% B. 1.50% C. 0.98% D. 1.03%

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