Consider a coupon bond with a $100 face value and a coupon payment equal to 3% of

the face value per year.

a. If there is one year to maturity, find the yield to maturity if the price of the bond is

$99.50.

YTM = ((P-S)+CP)/P

YTM = ((100-99.5)+3)/100

YTM = 0.0305 = 3.5%

b. If the risk-free rate is 2.25%, calculate the default risk premium.

Default Risk Premium = 3.51%-2.25% = 1.26%

1) (Pleas see above question and and answer) Why might the actualized holding period return not match the yield to maturity when the

bond was bought?

2) History has shown that risk spreads and yield curves may give us an idea about future recessions. Briefly discuss for both risk spreads and yield curves what behaviors may predict future economic downturns.

3) Explain why a bank might enter into a fixed-for-floating interest rate swap as a fixed rate payer.

4) Suppose you wanted to speculate on the price of gold increasing using COMEX 100 Gold Futures.

a. Go to cmegroup.com and find how much initial margin you would need to start a long position of 1 contract. Note: initial margin = 1.10 x maintenance margin.

b. How much could the price of gold (per troy ounce) fall before you would have to deposit additional funds to bring the account back up to its maintenance margin level?