a. How does the money substitute hypothesis explain the term structure of interest rates? (7 marks)

b. A stock is trading at a price of $100 and has beta 0.8. A call option can be replicated by a portfolio consisting of 0.7 shares of the stock (this is the delta of the call) and a risk-free loan of $20. What is the beta of the call option? (9 marks)

c. The risk-free rate is 3%. The credit-spread of a bond (the difference between the yield-to-maturity and the risk-free rate) is 1%. The face value of the bond is $1,000, and the clean price is $1,010. The bond has annual coupon payments, and a coupon payment has just been made, with a further 5 coupons remaining. What is the coupon rate of the bond?