Problems:

1. Consider the following zero-coupon yields on default free securities:

Maturity (years)	1	2	3	4	5
Zero-Coupon YTM	5.80%	5.50%	5.20%	5.00%	4.80%

What is the price today of a two-year, default-free security with a face value of $1000 and an annual coupon rate of 5.75%? Does this bond trade at a discount, premium, or at par?

2. Explain why the expected return of a corporate bond does not equal its yield to maturity.

3. The prices of several bonds with face values of $1000 are summarized in the following table:

Bond A B C D

Price $972.50 $1040.75 $1150.00 $1000.00

For each bond, state whether it trades at a discount, at par, or at a premium.

4. Suppose the yield on German government bonds is 1%, while the yield on Spanish government bonds is 6%. Both bonds are denominated in euros. Which country do investors believe is more likely to default? Why?