Assuming All Else Is Constant, Which of the Following Statements

question 80

Multiple Choice

Assuming all else is constant, which of the following statements is CORRECT?

• A) Other things held constant, a 20-year zero coupon bond has more reinvestment risk than a 20-year coupon bond.
• B) Other things held constant, for any given maturity, a 1.0 percentage point decrease in the market interest rate would cause a smaller dollar capital gain than the capital loss stemming from a 1.0 percentage point increase in the interest rate.
• C) From a corporate borrower's point of view, interest paid on bonds is not tax-deductible.
• D) Other things held constant, price sensitivity as measured by the percentage change in price due to a given change in the required rate of return decreases as a bond's maturity increases.
• E) For a bond of any maturity, a 1.0 percentage point increase in the market interest rate (rd) causes a larger dollar capital loss than the capital gain stemming from a 1.0 percentage point decrease in the interest rate.

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Definitions:

Duration

A measure of the sensitivity of the price of a bond or other debt instrument to a change in interest rates, usually expressed in years.

Perpetuity

A financial term for a constant stream of identical cash flows with no end.

Yield

The earnings from an investment, like dividends or interest, shown as a percentage of the investment's original cost or its current market valuation.

Perpetuity

A type of financial instrument that provides an infinite stream of interest payments.