You Are Considering 2 Bonds That Will Be Issued Tomorrow

question 33

True/False

You are considering 2 bonds that will be issued tomorrow.Both are rated triple B (BBB, the lowest investment-grade rating), both mature in 20 years, both have a 10% coupon, neither can be called except for sinking fund purposes, and both are offered to you at their $1,000 par values.However, Bond SF has a sinking fund while Bond NSF does not.Under the sinking fund, the company must call and pay off 5% of the bonds at par each year.The yield curve at the time is upward sloping.The bond's prices, being equal, are probably not in equilibrium, as Bond SF, which has the sinking fund, would generally be expected to have a higher yield than Bond NSF.

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Definitions:

Consumption Bundle

A mix of various goods and services selected by consumers based on their preferences and budget limitations.

Slope

The rate at which one variable changes in relation to another, representing the steepness of a line on a graph.

Indifference Curves

Graphical representations of different bundles of goods between which a consumer is indifferent, showing preferences.

Consumption Bundle

A set of goods or services that an individual considers purchasing, given their income and the prices of those goods/services.