Assume that you have a short investment horizon (less than 1 year). You are considering two investments: a 1-year Treasury security and a 20-year Treasury security. Which of the two investments would you view as being riskier? Explain.

If you buy a callable bond and interest rates decline, will the value of your bond rise by as much as it would have risen if the bond had not been callable? Explain.

Assume you have a one-year investment horizon and are trying to choose among three bonds. All have the same degree of default risk and mature in 10 years. The first is a zero-coupon bond that pays $1,000 at maturity. The second has an 8% coupon rate and pays the$80 coupon once per year. The third has a 10% coupon rate and pays the $100 coupon once per year. If you expect their yields to maturity to be 8% at the beginning of next year, what will their prices be then? What is your rate of return on each bond during the one-year holding period?

Discuss the following statement: A bond’s yield to maturity is the bond’s promised rate of return, which equals its expected rate of return.

Assume you have a one-year investment horizon and are trying to choose among three bonds. All have the same degree of default risk and mature in 10 years. The first is a zero-coupon bond that pays $\$1,000$ at maturity. The second has an $8\%$ coupon rate and pays the $\$80$ coupon once per year. The third has a 10% coupon rate and pays the $\$100$ coupon once per year.

a. If all three bonds are now priced to yield $8\%$ to maturity, what are their prices?

b. If you expect their yields to maturity to be $8\%$ at the beginning of next year, what will their prices be then? What is your rate of return on each bond during the one-year holding period?