1. Explain why we observe that, when interest rates increase, bond prices decrease! Don’t lenders like high interest rates?
2. An investment provides cash inflows of $500 per year for 15 years. What is the payback period if the initial cost is $10,000? Should you proceed with this investment?
3. Assume a StatOil (STL) bond with a 10% coupon and 8% yield-to-maturity. If the bond’s yield-to-maturity remains constant, the in one year, will the bond’s price be higher, lower, or unchanged? Explain briefly.