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:

Opportunity Cost

The drawback of dismissing the next superior alternative during the decision process.

Real-Life Situations

Scenarios or events that occur outside theoretical or simulated environments, involving genuine contexts and conditions.

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Professionals who study, develop, and apply theories and concepts from economics and write about economic policy.

Labor Time

The amount of time workers spend producing goods or delivering services.