QUESTION 13 Consider a nominal (ordinary) bond and a real (inflation protected) bond of the same maturity. If investors inflation expectations for that maturity increase, what happens? The price of the nominal increases whereas the price of the real decreases The price of the nominal decreases whereas the price of the real increases The prices of both decrease The price of the nominal decreases whereas the price of the real does not change The price of the nominal does not change whereas the price of the real increases 3 points

QUESTION 14 Suppose you expect the 5-yrar real interest rate to decline in the next few days. Which of the following is correct? It is sensible to purchase a 5-year ordinary bond, but not a 5-year inflation protected bond It is sensible to purchase a 5-year inflation protected bond, but not a 5-year ordinary bond It is sensible to purchase either bond It is not sensible to purchase either bond 3 points

QUESTION 15 You have a three-year investment period. Which do you prefer a 3-yr investment that pays 6% or a 2-year investment that pays 5.75% and you will reinvest at 6.25%? the 3-yr the 2-yr plus 1-yr reinvestment no preference 3 points

QUESTION 16 ABC corporation has two bonds, each with a 20-year maturity and 6% coupon. One is a bullet, the other an amortizer. If the yield-to-maturity of each bond were to increase by 1%, the price of which would decline (in percent) more? The bullet The amortizer Both decline equally because they have the same maturity Cannot answer question without knowledge of the amortization schedule 3 points

QUESTION 17 When following a "Yield Curve Roll-Down" strategy, which would be the best situation? A modestly upward sloping yield curve A steeply upward sloping yield curve A flat yield curve A steeply downward sloping yield curve A modestly downward sloping yield curve 3 points QUESTION 18 You Bet Your Life Insurance Company sold a perpetuity one year ago which promises to pay 25,000 annually. It was sold at a price of 500,000. What is its price today if the rate of discount has not changed? 525,000 500,000 475,000 Discount rate required in order to choose 3 points

QUESTION 19 Bond A is a twenty-year government bond with a 5% coupon. Bond B is the same but with a 7.5% coupon. Compared to A: 4 points B has a higher price and greater (percentage price) sensitivity to changes in its yield B has a lower price and greater (percentage price) sensitivity to changes in its yield B has a higher price and less (percentage price) sensitivity to changes in its yield B has a lower price and less (percentage price) sensitivity to changes in its yield