1. A 10-year zero-coupon bond has a yield of 6 percent. Through a series of unfortunate circumstances, expected inflation rises from 2 percent to 3 percent. Assuming the nominal yield rises by an amount equal to the rise in expected inflation, compute the change in the price of the bond.
2. In what ways can managers harm stockholder? How would you design an executive compensation contract to ensure that managers have the right incentives?