. Please answer the following conceptual questions related to factors affecting bond yields.

a. Write out an equation for the nominal interest rate on any debt security. Briefly explain each factor and why is affects interest rate.

b. Differentiate between interest rate risk and reinvestment rate risk. To which type of risk are holders of long-term bonds more exposed? Short-term bondholders? Explain. c. Why are U.S. Treasury bonds not riskless? To what types of risk are investors of foreign bonds exposed?

Explain. d. List some factors that affect bond ratings. How are bond ratings correlated with default risk premium?

e. Which bond usually will have a higher liquidity premium: one issued by a large company or one issued by a small company? Explain.

f. Why do convertible bonds and bonds with warrants have lower coupons than similarly rated bonds that do not have these features? Explain.