1. You are considering the purchase of Bond X, which matures in ten years and has a par value of $1000. During the first five years, X has a 6% coupon with semi-annual payments. During the remaining five years, X has an 8% coupon with semi-annual payments. The face value is paid at maturity. A second 10-year security, Security Z, has a 6% semiannual coupon and is selling at par. Assuming that X has the same (bond equivalent) yield as Z, the price of Bond X is closest to:
a. $943
b. $1,036
c. $1,063
2. Which of the following is an advantage of a callable bond (compared to an identical option-free bond)?
a. Less reinvestment risk
b. Higher yield
c. More convexity