1. Consider a 20-year bond with 27 warrants. Each warrant has a strike price of $25 and 10 years until expiration. Each warrant value is estimated to be $5. The yield to maturity of a 20-year bond without warrants is 12%. What coupon rate must be set on the bond with warrants to make the total package sell for $1,000?

A. 10.19%

B. 13.75%

C. 11.50%

D. 10.68%

2. Assume that you purchased a $1,000 perpetual bond (coupon payment is $50) and the interest rate on that bond declined from 5 percent to 2 percent. Thus,

A) the bond price increased by $1,500

B) you could sell this bond at a capital gain

C) at an interest rate of 2%, the speculative demand for money would increase

D) all of the above

E) none of the above