Which of the Following Statements Is CORRECT

question 53

Multiple Choice

Which of the following statements is CORRECT?

• A) 10-year, zero coupon bonds have more reinvestment rate risk than 10-year, 10% coupon bonds.
• B) A 10-year, 10% coupon bond has less reinvestment rate risk than a 10-year, 5% coupon bond (assuming all else equal).
• C) The total (rate of) return on a bond during a given year is the sum of the coupon interest payments received during the year and the change in the value of the bond from the beginning to the end of the year, divided by the bond's price at the beginning of the year.
• D) The price of a 20-year, 10% bond is less sensitive to changes in interest rates than the price of a 5-year, 10% bond.
• E) A $1,000 bond with $100 annual interest payments that has 5 years to maturity and is not expected to default would sell at a discount if interest rates were below 9% and at a premium if interest rates were greater than 11%.

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Definitions:

Static Thinking

Static thinking is a cognitive approach where an individual perceives situations or concepts as unchanging and fails to recognize the potential for growth or alteration.

Symbolic Thinking

The process of using symbols, such as words or images, to represent objects, actions, or ideas not immediately present.

Limbic System

A complex system of nerves and networks in the brain, involving several areas near the edge of the cortex concerned with instinct and mood. It controls the basic emotions (fear, pleasure, anger) and drives (hunger, sex, dominance, care of offspring).

Reactivity

The state or capacity of being reactive or the degree to which a thing is reactive.