Which of the Following Statements Is CORRECT

question 64

Multiple Choice

Which of the following statements is CORRECT?

• A) 10-year,zero coupon bonds have more reinvestment risk than 10-year,10% coupon bonds.
• B) A 10-year,10% coupon bond has less reinvestment risk than a 10-year,5% coupon bond (assuming all else equal).
• C) The total (rate of)return on a bond during a given year is the sum of the coupon interest payments received during the year and the change in the value of the bond from the beginning to the end of the year,divided by the bond's price at the beginning of the year.
• D) The price of a 20-year,10% bond is less sensitive to changes in interest rates than the price of a 5-year,10% bond.
• E) A $1,000 bond with $100 annual interest payments that has 5 years to maturity and is not expected to default would sell at a discount if interest rates were below 9% and at a premium if interest rates were greater than 11%.

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Definitions:

Straight-line Method

A method of allocating the cost of a tangible asset over its useful life in equal annual amounts.

Salvage Value

The projected remaining worth of an asset upon reaching the end of its serviceable duration.

Depreciation Expense

The allocation of the cost of a tangible asset over its useful life, reflecting its decrease in value over time.

Straight-line Depreciation

A method of allocating the cost of a tangible asset over its useful life evenly.