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If bond A's duration is 4 and bond B is a 3-year, zero coupon bond, then bond B is more volatile to interest rate changes compared to bond A.

Duration of a zero coupon bond equals to the YTM of the bond.

The price risk and the reinvestment risk offset each other if the duration equals to the maturity of the bond

Investors face price risk and reinvestment risk when market rates change

Duration shows the weighted average time of receiving the par value of the bond

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Question 18

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If the YTM is higher than the reinvestment rate then the bond will have total/realized return that is lower than the YTM.

If you want to avoid both the reinvestment risk and the price risk you can purchase a 3-year 3% coupon bond and keep it until maturity.

If we know only the maturity of a zero coupon bond, we can calculate the bond's duration

Everything else equal, Bond A will have shorter duration than bond B if bond A has higher coupon rate than bond B

If we know only the duration and the face value of the bond we can calculate the future value of the bond's coupons.

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Question 19

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Select the answer/answers that is/are correct. (this question worth 2 points).

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If Fed wants to increase the money supply it purchases government securities from the market.

Fisher equation shows that if the expected inflation increases the nominal rate of interest will also increase.

If inflation rate is higher than the target rate of inflation then the Fed is likely to increase the interest rates.

If the bank and the borrower don't have access to the same information about the borrower's credit quality then there is an Information Asymmetry between the bank and the borrower.

If Fed increases the Reserve Requirement the money supply will decrease.