1. Assume that the yield on a 5 year security is 2.75% , the one year yield is 1.20%, and your expectations for the next 4 year one year yields are 1.55%, 2.19%, 2.98%, and 3.10%. Determine whether you should invest in the 5 year security or 5 consecutive one year securities according to the un-bias expectations theory. Depending upon your answer what should happen to the long term and short yields in the market?

2. Northern Electric sold 30-year bond 3 years ago. The bond pays a 6.5 percent annual coupon and have a $1,000 face value. The current price per bond is $1005.20. What is the firm’s pretax cost of debt?

a) 5.87 percent

b) 6.01 percent

c) 6.23 percent

d) 6.46 percent

e) 6.78 percent