Consider Each of the Following Bonds: Bond A $\quad 8$ -Year Maturity with A

question 20

Multiple Choice

Consider each of the following bonds: Bond A: $\quad 8$ -year maturity with a $7 \%$ annual coupon.
Bond B: $\quad 10$ -year maturity with a $9 \%$ annual coupon.
Bond C: $\quad 12$ -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 risk.
• D) Bond C has the most 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:

Prepaid Account

An account reflecting payments made in advance for goods or services, which are recognized as expenses when the goods or services are actually consumed.

Accounts Payable

Short-term liabilities representing amounts owed to suppliers or creditors for goods and services received but not yet paid for.

Trial Balance

A bookkeeping worksheet in which the balances of all ledgers are compiled into debit and credit account columns to check the accuracy of the entries.

Journal Entry

A record in accounting that represents a transaction, documenting the debit and credits affected by it.