Which of the Following Statements Is CORRECT

question 1

Multiple Choice

Which of the following statements is CORRECT?

• A) You hold two bonds,a 10-year,zero coupon,issue and a 10-year bond that pays a 6% annual coupon.The same market rate,6%,applies to both bonds.If the market rate rises from its current level,the zero coupon bond will experience the larger percentage decline.
• B) The time to maturity does not affect the change in the value of a bond in response to a given change in interest rates.
• C) You hold two bonds.One is a 10-year,zero coupon,bond and the other is a 10-year bond that pays a 6% annual coupon.The same market rate,6%,applies to both bonds.If the market rate rises from the current level,the zero coupon bond will experience the smaller percentage decline.
• D) The shorter the time to maturity,the greater the change in the value of a bond in response to a given change in interest rates,other things held constant.
• E) The longer the time to maturity,the smaller the change in the value of a bond in response to a given change in interest rates.

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Definitions:

Financial Models

Quantitative tools built to represent the performance of a financial asset or portfolio, often used for forecasting and decision making.

Leveraged Firm

A company that uses borrowed capital or debt to fund its operations and investments, aiming to increase potential returns to shareholders.

Risk-Free Rate

The return on investment with no risk of financial loss, typically represented by the yield on government securities.

Market Risk Premium

The extra return investors demand for choosing to invest in the market over a risk-free asset.