A 7 Percent Coupon Bond Has 10 Years to Maturity

question 78

Multiple Choice

A 7 percent coupon bond has 10 years to maturity and could be called in three years. If the bond is called, investors will earn 5.5 percent. The call premium is one year of coupon payments. If coupon payments are made semiannually and par value is $1,000, what is the bond's yield to maturity?

• A) 2.84 percent
• B) 3.17 percent
• C) 5.38 percent
• D) 5.67 percent

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Definitions:

Sharpe Ratio

A measure used to assess the risk-adjusted return of an investment by comparing its excess return to its standard deviation of returns.

Holding Period

The length of time an investment is held by an investor before being sold, which can affect tax treatment and investment strategy.

Correlation Coefficients

A measure that indicates the extent to which two variables change together, ranging from -1 to 1, where 1 means perfect positive correlation, and -1 means perfect negative correlation.

Diversification Benefits

The reduction in investment risk that is achievable by holding a variety of different investment instruments that have low correlation with each other.