Question

Assume an investor buys an 8 percent, semi-annual, 10-year bond at par. He sells it two...

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.
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