You Are Considering Three Different Bonds for Your Portfolio

question 5

Multiple Choice

You are considering three different bonds for your portfolio.Each bond has a 10-year maturity and a yield to maturity of 10%.Bond X has an 8% annual coupon, Bond Y has a 10% annual coupon, and Bond Z has a 12% annual coupon.Which of the following statements is CORRECT?

• A) Bond X has the greatest reinvestment rate risk.
• B) If market interest rates decline, all of the bonds will have an increase in price, and Bond Z will have the largest percentage increase in price.
• C) If market interest rates remain at 10%, Bond Z's price will be 10% higher one year from today.
• D) If market interest rates increase, Bond X's price will increase, Bond Z's price will decline, and Bond Y's price will remain the same.
• E) If the bonds' market interest rates remain at 10%, Bond Z's price will be lower one year from now than it is today.

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Definitions:

Multiple Correlation

A statistical technique that measures the strength of the relationship between one dependent variable and two or more independent variables.

Independent Variables

are the factors in an experiment that are deliberately manipulated or varied by the researcher to examine their effect on dependent variables.

Accuracy of Prediction

The degree to which a prediction matches the actual outcomes.

Criterion Variable

The dependent variable in a study or analysis that the independent variables aim to predict.