Question 6 [20 marks)

Required: Answer questions a) and b) below.

a) (10 marks) Which of the following statements is correct? Choose only one.

i) A nominal interest rate we observe contains the effect of inflation and therefore is typicaly lower than a real interest rate.

ii) Bonds with a rating of B or higher are considered an investment grade

iii) As the interest rate declines, a bond becomes worth less because the present value of the bond's remaining cash flows declines.

iv) A downward-sloping term structure of interest rates can be observed when the expected decline in inflation is large enough to offset the interest rate risk premium

v) None of the above.

b) [10 marks]

Complete each of the following statements.

i) Bonds are often issued with a provision, which is the option to repay debt at

a specified price prior to matunity.

ii) The invoice price, or full price, of a bond is inclusive of accued interests and is often

referred to as a .