Solve following situations.

8. You are offered a note which pays $1,000 in 15 months (or 456 days) for $850. You have $850 which pays a 6.76649% nominal rate, with 365 daily compounding, which is a daily rate of .018538% and an EAR of 7%. You plan to leave the money in the bank if you do not buy the note. The note is riskless. Should you buy it? Use three ways to check the decision.

1. Jackson Central has a 6-year, 8% annual coupon bond with a $1,000 par value. Earls Enterprises has a 12-year, 8% annual coupon bond with a $1,000 par value. Both bonds currently have a yield to maturity of 6%. If the market yield increases to 7%, which bond will you recommend to your client?

10. Assume the real rate of interest on 1-year, 10-year, and 30-year bonds is 3%. Also assume the rate of inflation is expected to be 3% for the coming year. Considering only an inflation premium, construct an example showing how an expected increase in the rate of inflation leads to an upward sloping term structure via the Fisher effect. Then, explain how the addition of interest rate risk will affect your results.