Bonds A,B,and C All Have a Maturity of 10 Years

question 75

Multiple Choice

Bonds A,B,and C all have a maturity of 10 years and a yield to maturity of 7%.Bond A's price exceeds its par value,Bond B's price equals its par value,and Bond C's price is less than its par value.None of the bonds can be called.Which of the following statements is CORRECT?

• A) If the yield to maturity on each bond decreases to 6%,Bond A will have the largest percentage increase in its price.
• B) Bond A has the most price risk.
• C) If the yield to maturity on the three bonds remains constant,the prices of the three bonds will remain the same over the next year.
• D) If the yield to maturity on each bond increases to 8%,the prices of all three bonds will decline.
• E) Bond C sells at a premium over its par value.

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Definitions:

Variable Costs

Costs that vary in direct proportion to changes in the level of production or sales.

Fixed Costs

Expenses that remain constant regardless of the level of output or sales, including rent, wages, and insurance costs.

Margin of Safety

The difference between actual or expected sales and sales at the break-even point. It measures how close a company is to not covering its fixed costs.

Break-even Sales

The amount of revenue from sales that exactly covers the fixed and variable costs of producing and selling a product, with no profit or loss.