1. In normal times, the liquidity premium is positive because ______________.
2. Under the expectations hypothesis, if the market expects yields to decrease in the future the slope of the yield curve will be ______________.
3. If you believe interest rates will fall in the future, what action should you take regarding your bond portfolio?
4. You buy a 5 year, semiannual bond with a coupon rate of 10% for $820. After 18 months, you sell the bond for $800. What was you rate of return over the 18 months?
5. If yields decrease, as a pension fund manager, what impact will you see on capital appreciation and reinvestment value?
6. Consider the following:
PB = $800
D = 5 years
ytm = 8%
What is the estimated price of the bond if yields were to increase by 2%?
7. Recall Question 14. If the convexity of the bond was given as 80.0, what would be the expected price now?