Question Details

An investor is considering buying one of two 



1.	A 10-year bond with a 9% annual coupon has a yield to maturity of 8%.  Which of the following statements is CORRECT?

a.	If the yield to maturity remains constant, the bond- price one year from now will be higher than its current price.
b.	The bond is selling below its par value.
c.	The bond is selling at a discount.
d.	If the yield to maturity remains constant, the bond- price one year from now will be lower than its current price.
e.	The bond- current yield is greater than 9%.
	
2.	A Treasury bond has an 8% annual coupon and a 7.5% yield to maturity.  Which of the following statements is CORRECT?

a.	The bond sells at a price below par.
b.	The bond has a current yield greater than 8%.
c.	The bond sells at a discount.
d.	The bond- required rate of return is less than 7.5%.
e.	If the yield to maturity remains constant, the price of the bond will decline over time.
	
3.	An investor is considering buying one of two 10-year, $1,000 face value, noncallable bonds: Bond A has a 7% annual coupon, while Bond B has a 9% annual coupon.  Both bonds have a yield to maturity of 8%, and the YTM is expected to remain constant for the next 10 years.  Which of the following statements is CORRECT?

a.	Bond B has a higher price than Bond A today, but one year from now the bonds will have the same price.
b.	One year from now, Bond A- price will be higher than it is today.
c.	Bond A- current yield is greater than 8%.
d.	Bond A has a higher price than Bond B today, but one year from now the bonds will have the same price.
e.	Both bonds have the same price today, and the price of each bond is expected to remain constant until the bonds mature.
	
4.	Which of the following statements is CORRECT?

a.	If a bond is selling at a discount to par, its current yield will be greater than its yield to maturity.
b.	All else equal, bonds with longer maturities have less interest rate (price) risk than bonds with shorter maturities.
c.	If a bond is selling at its par value, its current yield equals its capital gains yield.
d.	If a bond is selling at a premium, its current yield will be less than its capital gains yield.
e.	All else equal, bonds with larger coupons have less interest rate (price) risk than bonds with smaller coupons.
	
5.	Which of the following statements is CORRECT?

a.	If a 10-year, $1,000 par, zero coupon bond were issued at a price that gave investors a 10% yield to maturity, and if interest rates then dropped to the point where rd = YTM = 5%, the bond would sell at a premium over its $1,000 par value.
b.	If a 10-year, $1,000 par, 10% coupon bond were issued at par, and if interest rates then dropped to the point where rd = YTM = 5%, we could be sure that the bond would sell at a premium above its $1,000 par value.
c.	Other things held constant, including the coupon rate, a corporation would rather issue noncallable bonds than callable bonds.
d.	Other things held constant, a callable bond would have a lower required rate of return than a noncallable bond because it would have a shorter expected life.
e.	Bonds are exposed to both reinvestment rate and interest rate price risk.  Longer-term low-coupon bonds, relative to shorter-term high-coupon bonds, are generally more exposed to reinvestment rate risk than interest rate price risk.




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