Question

Assume an investor buys an 8 percent, semi-annual, 10-year bond at par. He sells it two years later after market interest rates have decreased to 6 percent. The investor’s capital gain is closest to:

		$124.
		$126.

Based on which of the following term structure theories are forward rates most useful?

		Expectations theory
		Market segmentation theory

Relative to a decrease in interest rates, an increase in interest rates of the same size will produce:

		a larger percentage change in a bond’s price.
		a smaller percentage change in a bond’s price.

Answer 1

1)