1. Assuming all else is equal, which of the following bonds would you prefer if current market interest rates are 5%?

a. annual bond with a 6% coupon rate

b. semiannual bond with a 6% coupon rate

c. annual bond with 5% coupon rate

d. semiannual bond with 4% coupon rate

e. annual bond with 4% coupon rate

2. Calculate the default risk premiums, and inflation risk premiums for these three bonds. Show your formula and calculations.

A) GT10:GOV 10-year U.S. Treasury Bond, Price = $99.05, yield = 2.36%

B) GTII10:GOV 10-year TIPS Bond, Price = $98.95, yield = 0.48%

C) MSFT4389877 Microsoft 10-year bond, Price = $96.87, yield = 2.802%