1. Suppose that the spot rate on 4-year bonds is 11%, and the spot rate on 5-year bonds is 12%. What forward rate is implied on a one-year bond 4 years in the future? (5 points)
2. Suppose the yield on a 30-year corporate bond rated AAA is 8.86 percent and the yield on a 30-year Treasury bond is 8.27 percent. What is the default risk premium? Would you expect a higher or lower default risk premium on a bond rated A? Explain your answer. (5 points)
3. At which stage of the business cycle (economic expansion or recession) would you expect bond issuers to exercise their call options? Explain your answer. (5 points)