Identify a problem associated with using the Black-Šcholes model to value bond options. а. It assumes short-term interest rates are constant. b. It assumes that commissions are charged. С. It assumes fluctuating variance of returns on the underlying asset. d. It assumes that the variance of bond prices is nonconstant over time. е. All of the above.

Consider the supply and demand equilibrium bond graph of the market. Consider the effects of the following scenarios on bond prices, bond interest rates and equilibrium quantities traded. a. Firms expect a decrease in their future profits. b. Expected rises. inflation

Give typing answer with explanation and conclusion  Question 16:   Which of the following statements about convexity are true?   I. Convexity accounts for the curvilinear function of bond rates   II. A bond with a very low coupon and a long maturity will have low convexity III. A bond investor would seek to avoid bonds with high convexity.   IV. Convexity is defined as the rate of change of the slope of the price/yield curve   V. There is an inverse relationship between maturity and convexity   a. I.   b. II. III. IV.   c. I. IV.   d. II. IV. V.   e. I. II. IV. V.

The inverted yield curve predicts that bond prices will fall. Select one: True OR False

With regard to interest rate sensitivity measures and bonds: Group of answer choices C. Convexity attempts to capture the sensitivity of a bond’s duration to changes in interest rates. D. Both B & C B. Duration is related to yield approximation and convexity is related to price. A. Convexity is related to yield approximation and duration is related to price

Which of the following is correct with regards to Theories of Term Structure?   When the shape of the yield curve depends on investors’ expectations about prospective prevailing interest rates, the Pure Exception Theory is being applied. When the economic outlook is improving, the yield curve inverts as it reflects no changes in inflation premium. The liquidity preference theory suggests that long-term rates are generally higher than short-term rates since investors perceive more liquidity in long-term investments. Under the Market segmentation theory, there is an apparent relationship between the yield curve and the prevailing rate of returns in each market segment.

If the forward rate is expected to be an unbiased estimate of the future spot rate, and interest rate parity holds, then: a. the international Fisher effect (IFE) is refuted. b. the international Fisher effect (IFE) is supported. c. covered interest arbitrage is feasible. d. the average absolute error from forecasting would equal zero.

Suppose an investor observes an upward term structure of interest rate. Answer the followingquestions. (a) According to the expectation hypothesis, what will be the investor’s forecast about futurechange of interest rate (increase, decrease or unchanged)?  (b) What will the investor say about the future change of interest rate according to liquiditypreference theory? Explain your argument.

Do you agree with the following statement? Explain why.“The information about a bond’s duration and convexity adjustment is sufficient to quantifyinterest rate risk exposure.

Which one of the following expressions about risk and returns is wrong? A. In general, one reason why a stock is riskier than a bond is that because cash flows from a bond are known and promised, whereas cash flows from a stock are neither known nor promised. B. According to CAPM model, a well-diversified portfolio will have a beta which equals to 0. C. Risk premium is the extra return provided on risky assets to compensate for risk. The difference between risky return and the risk-free return. D. Unexpected return happened because new information came to light which caused our expectations about prices and returns to change.