1. If the level of interest rates decrease (possibly due to a decrease in expected inflation rates) for the overall economy, how do bond prices of existing, outstanding bonds react, and why?
2. BP has a $1,000 par value bond outstanding that pays 12 percent annual interest. The current yield to maturity on such bonds in the market is 10 percent. Compute the price of the bonds for the following maturity dates. Show all your work for full credit.
a. 30 years
b. 10 years
c. 5 years
3. You can trade in the capital market when you have a budget deficit.
a. True
b. False