1. For each of following scenarios, using the bond market model, illustrate how each will affect the price and yields on US Corporate Bonds:
   • Brokerage commissions on stocks increase
   • People expect a bear market in stocks (stock prices are expected to decline)
   • Expected inflation increases
   • There is a sudden increase in volatility in the corporate bond market.
   • There is a significant increase in the marginal income tax rate.
   • There is a substantial increase in the Federal government deficit.
   • People expect future real estate prices to increase?

1. What is the yield to maturity for a one-year T-Bill with a face value of $10,000 that sells for $9,880?
2. What relationship exists between bond prices and interest rates? How is this relationship affected by the length to maturity? (i.e. interest rate risk). According to economists, what is the most accurate measure of interest rates?

1. Under what conditions would the current yield be an accurate measure of the yield to maturity?

1. Distinguish between the interest rate and a bonds rate of return. Under what conditions would they be the same?

1. What is meant by the real interest rate? Given your answer to #10, what would be the real interest rate if expected inflation is 2%?

1. What is the price of a consol (perpetuity) that has a coupon of $50 per year and a yield to maturity of 2.5%? If the yield to maturity doubles, what will happen to the perpetuitys price? What is the new price? What would be the bonds one year rate of return?

1. Consider a coupon bond that has a $1,000 par value and a coupon rate of 10%. The bond is currently selling for $1,044.80 and has 2 years to maturity. What is the bonds yield to maturity?

1. Distinguish between direct and indirect finance. Which is most common? Why?