A Bond Has a Par Value of $1,000, a Time

question 108

Multiple Choice

A bond has a par value of $1,000, a time to maturity of 20 years, a coupon rate of 10% with interest paid annually, a current price of $850, and a yield to maturity of 12%.Intuitively and without using calculations, if interest payments are reinvested at 10%, the realized compound yield on this bond must be

• A)10.00%.
• B)10.9%.
• C)12.0%.
• D)12.4%.

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Definitions:

Hotelling Rule

A principle from the economics of non-renewable resource management suggesting that the net price of a resource should increase at the rate of interest over time to ensure efficient extraction and usage.

Marginal Cost

The expense incurred from manufacturing an extra unit of a product or service.

Hotelling Rule

An economic theory that predicts how the price of a non-renewable resource should rise over time, balancing between resource depletion and the interest rate.

Interest Rate

The cost of borrowing money or the return on investment, expressed as a percentage of the principal amount per time period.