1. In normal times, the liquidity premium is positive because ______________.

2. Under the expectations hypothesis, if the market expects yields to decrease in the future the slope of the yield curve will be ______________.

3. If you believe interest rates will fall in the future, what action should you take regarding your bond portfolio?

4. You buy a 5 year, semiannual bond with a coupon rate of 10% for $820. After 18 months, you sell the bond for $800. What was you rate of return over the 18 months?

5. If yields decrease, as a pension fund manager, what impact will you see on capital appreciation and reinvestment value?

6. Consider the following:

P_B = $800

D = 5 years

ytm = 8%

What is the estimated price of the bond if yields were to increase by 2%?

7. Recall Question 14. If the convexity of the bond was given as 80.0, what would be the expected price now?