Which of the Following Statements Is Most Correct

question 6

Multiple Choice

Which of the following statements is most correct?

• A) A 10-year 10 percent coupon bond has less reinvestment rate risk than a 10-year 5 percent coupon bond (assuming all else equal).
• B) The total return on a bond for a given year arises from both the coupon interest payments received for the year and the change in the value of the bond from the beginning to the end of the year.
• C) The price of a 20-year 10 percent bond is less sensitive to changes in interest rates (i.e., has lower interest rate price risk) than the price of a 5-year 10 percent bond.
• D) A $1,000 bond with $100 annual interest payments with five years to maturity (not expected to default) would sell for a discount if interest rates were below 9 percent and would sell for a premium if interest rates were greater than 11 percent.
• E) Answers a, b, and c are correct statements.

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Definitions:

Taxes

Mandatory financial charges or levies imposed by a government on individuals and organizations to fund public expenditures.

Profitability Index

A financial tool that calculates the relative profitability of an investment by dividing the present value of future cash flows by the initial investment cost.

Initial Investment

The initial amount of money invested in a project or business venture.

CCA Rate

Refers to Capital Cost Allowance rate, which is the rate at which a business can claim tax depreciation on certain properties or equipment in Canada.