1. The following tables shows the prices of a sample of treasury strips. Each strip makes a single payment at maturity.
Years to maturity Price, (% of face value)
1 98.352%
2 94.851
3 91.044
4 86.980
a. What is the 1-year interest rate?
b. What is the 2-year interest rate?
c. What is the 3-year interest rate?
d. What is the 4-year interest rate?
2. Conservatively leveraged Firm A and highly leveraged Firm B operate at the same level of earnings before interest and taxes. Which firm has a higher change in volume?
A. Firm A
B. Firm B
C. The change in volume does not affect the amount of leverage.
D. There is not enough information to answer the question.