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1. Would you rather have a savings account that pays 5% interest compounded semi-annually or one that pays 5% interest compounded daily? Explain. 2. “Short-term interest rates are more volatile than long-term interest rates, so short-term bonds are more sensitive to interest changes than re long-term bond prices.” 3. Is this statement true or false? Explain. 4. If investor’s aversion risk increased would the risk premium on a high-beta stock increase by more or less than on a low-beta stock? Explain. 5. A bond that pays interest forever and has no maturity is a perpetual bond, also called a perpetuity or a consol. In what respects is a perpetual bond similar to (1) a no growth common stock and (2) a share of preferred stock? 6. Why do options sell at prices higher than their exercise values? 7. Distinguish between the beta (or market) risk, within-firm (or corporate) risk, and stand-alone risk for a potential project. Of these three measures, which is theoretically the most relevant, and why?
