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34.If forward rates are known with certainty and all bonds are fairly priced

A)all bonds would have the same yield to maturity.

B)all short-maturity bonds would have lower prices than all long-maturity bonds.

C)all bonds would have the same price.

D)all bonds would provide equal 1-year rates of return.

E)none of the above.

Use the following to answer questions 35-38:

Suppose that all investors expect that interest rates for the 4 years will be as follows:

YearForward Interest Rate

0(today)5%

17%

29%

310%

35.What is the price of 3-year zero coupon bond with a par value of $1,000?

A)$863.83

B)$816.58

C)$772.18

D)$765.55

E)none of the above

36.If you have just purchased a 4-year zero coupon bond, what would be the expected rate of return on your investment in the first year if the implied forward rates stay the same? (Par value of the bond = $1,000)

A)5%

B)7%

C)9%

D)10%

E)none of the above

37.What is the price of a 2-year maturity bond with a 10% coupon rate paid annually?  (Par value = $1,000)

A)$1,092.97

B)$1,054.24

C)$1,000.00

D)$1,073.34

E)none of the above

38.What is the yield to maturity of a 3-year zero coupon bond?

A)7.00%

B)9.00%

C)6.99%

D)7.49%

E)none of the above

Essay Question 3.  (15 points)

The yield curve for T-Bonds has been shifting downward as inflation fears are lessened as the economy is starting to slow down. The high quality bond indexes have been rising, but the high yield bond indexes has continued to decline. Why is an economic slowdown good for high rated bonds, but bad for low-rated bonds? Explain.

Use the following to answer questions 39-40:

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