1. Which of the following statements is most correct?

1. Bonds with shorter times to maturity have less sensitivity to changes in interest rates, all else equal.

b. If market interest rates increase, firms that can call their bonds will be inclined to do so. c. Default risk refers to the risk that firms may not be able to make debt service payments.

d. Statements (a) and (c) are both correct.

e. Statements (b) and (c) are both correct.

2. Stock X has a required return of 12 percent, a dividend yield of 5 percent, and its dividend will grow at a constant rate forever. Stock Y has a required return of 10 percent, a dividend yield of 3 percent, and its dividend will grow at a constant rate forever. Both stocks currently sell for $25 per share. Which of the following statements is most correct?

a. Stock X pays a higher dividend per share than Stock Y.

2. Stock X has a lower expected growth rate than Stock Y.
3. One year from now, the two stocks are expected to trade at the same price.
4. Statements a and b are correct.
5. Statements a and c are correct.