Three $1,000 Face Value,10-Year,noncallable,bonds Have the Same Amount of Risk,hence

question 74

Multiple Choice

Three $1,000 face value,10-year,noncallable,bonds have the same amount of risk,hence their YTMs are equal.Bond 8 has an 8% annual coupon,Bond 10 has a 10% annual coupon,and Bond 12 has a 12% annual coupon.Bond 10 sells at par.Assuming that interest rates remain constant for the next 10 years,which of the following statements is CORRECT?

• A) Bond 8's current yield will increase each year.
• B) Since the bonds have the same YTM,they should all have the same price,and since interest rates are not expected to change,their prices should all remain at their current levels until maturity.
• C) Bond 12 sells at a premium (its price is greater than par),and its price is expected to increase over the next year.
• D) Bond 8 sells at a discount (its price is less than par),and its price is expected to increase over the next year.
• E) Over the next year,Bond 8's price is expected to decrease,Bond 10's price is expected to stay the same,and Bond 12's price is expected to increase.

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Definitions:

ROE

Return on Equity, a measure of a corporation's profitability that reveals how much profit a company generates with the money shareholders have invested.

Repurchase Shares

The act of a company buying back its own shares from the marketplace, reducing the amount of outstanding stock.

Debt-Equity Ratio

A ratio showcasing the relative utilization of debt and equity in the financial structuring of a company’s assets.

Required Return

The minimum expected return by an investor for investing in a particular security or project, considering the risk associated with the investment.