Which of the Following Statements Is CORRECT

question 75

Multiple Choice

Which of the following statements is CORRECT?

• A) If a 10-year, $1,000 par, zero coupon bond were issued at a price that gave investors a 10% yield to maturity, and if interest rates then dropped to the point where rd = YTM = 5%, the bond would sell at a premium over its $1,000 par value.
• B) If a 10-year, $1,000 par, 10% coupon bond were issued at par, and if interest rates then dropped to the point where rd = YTM = 5%, we could be sure that the bond would sell at a premium above its $1,000 par value.
• C) Other things held constant, including the coupon rate, a corporation would rather issue noncallable bonds than callable bonds.
• D) Other things held constant, a callable bond would have a lower required rate of return than a noncallable bond because it would have a shorter expected life.
• E) Bonds are exposed to both reinvestment risk and price risk. Longer-term low-coupon bonds, relative to shorter-term high-coupon bonds, are generally more exposed to reinvestment risk than price risk.

---

Definitions:

Tax Increases

A rise in the rate of taxes imposed by governments on individuals or businesses.

Inflationary Gap

A situation where the total demand for goods and services exceeds the total supply at current prices, leading to upward pressure on prices and inflation.

Full Employment GDP

The level of gross domestic product achieved when the economy is fully employing all available labor and resources, maximizing output.

Aggregate Supply

The aggregate amount of products and services that companies in an economy intend to sell over a particular time frame.