1)Which of the following increase the price sensitivity of a bond to changes in interest rates?
I. increase in time to maturity
II. decrease in time to maturity
III. increase in coupon rate.
IV. decrease in coupon rate
a) II only
b) II and IV
c) II and III
d) II and IV
2) Which one of the following bonds is the least sensitive to interest rate risk?
a) 3 year 6% coupon
b) 5 year 6% coupon
c) 7 year 6% coupon
d) 7 year 4% coupon
3)Which of the following statements is correct concerning the term structure of interest rates?
I. Expectations of lower inflation rates in the future tend to lower the slope of the term structure of interest rates.
II. The term structure of interest rates includes both an inflation premium and an interest rate risk premium.
III. The real rate of return has minimal if any affect on the slope of the term structure of interest rates.
IV. The term structure of interest rates and the time to maturity are always directly related.