Consider Each of the Following Bonds: Bond A: 8-Year Maturity

question 15

Multiple Choice

Consider each of the following bonds: Bond A: 8-year maturity with a 7% annual coupon.
Bond B: 10-year maturity with a 9% annual coupon.
Bond C: 12-year maturity with a zero coupon.
Each bond has a face value of $1,000 and a yield to maturity of 8%. Which of the following statements is NOT correct?

• A) Bond A sells at a discount, while Bond B sells at a premium.
• B) If the yield to maturity on each bond falls to 7%, Bond C will have the largest percentage increase in its price.
• C) Bond C has the most reinvestment rate risk.
• D) Bond C has the most interest rate (price) risk.
• E) If the yield to maturity is constant, the price of Bond A will continue to increase over its life until it finally sells at par.

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Definitions:

Balance Sheet Approach

A method for evaluating foreign subsidiaries in which assets and liabilities are translated at the current exchange rate, whereas equity accounts are translated at the historical exchange rates.

Allowance for Doubtful Accounts

An accounting provision made for potential future bad debts that might arise from credit sales being unpaid.

Uncollectible Accounts

Receivables that are considered to be uncollectable and are written off as a loss because payment is highly unlikely.

Net Credit Sales

The total value of sales made on credit during a period, minus any returns or allowances.