# Which of the following statements about interest rate

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25. Which of the following statements about interest rate risk are true? All else equal: I. The longer the maturity, the greater the interest rate risk. II. The higher the coupon rate, the greater the interest rate risk. III. The higher the initial yield, the greater the interest rate risk. a. I only b. I and II only c. II and III only d. I and III only e. I, II and III 26. The right of the bond issuer to purchase a bond from the holder at a predetermined price prior to maturity is referred to as: 27. The portion of a bond’s yield that compensates investors for the possibility that the bond’s interest or principal might not be paid is called the: 28. A \$1,000 face value corporate bond with 15 years to maturity pays a 9.125% semiannual coupon. The YTM is 8.00%. Calculate the price of the bond. 9

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29. A payday loan operation is a business that offers to “cash” your paycheck two weeks early for \$50 fee. The maximum loan size is \$500. So if you borrow \$500 for two weeks, you receive \$500 now and pay \$550 in two weeks. Calculate BOTH the APR and the EAR for this \$500, two-week loan with the \$50 interest payment. Assume there are exactly 26 two- week periods per year. (Note: This is really how pay-day loan operations work!) a. APR = 2.50%; EAR = 2.53% b. APR = 6.50%; EAR = 6.31% c. APR = 6.50%; EAR = 6.61% d. APR = 65.00%; EAR = 50.56% e. APR = 260.00%; EAR = 1091.82% 30. Suppose the required real rate of return is on a T-Bill is 5.50% and the expected inflation rate is 2.60%. What would be that exact nominal rate paid on a T-Bill? 10

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