The YTMs of Three $1,000 Face Value Bonds That Mature

question 24

Multiple Choice

The YTMs of three $1,000 face value bonds that mature in 10 years and have the same level of risk are equal.Bond A has an 8% annual coupon, Bond B has a 10% annual coupon, and Bond C has a 12% annual coupon.Bond B sells at par.Assuming interest rates remain constant for the next 10 years, which of the following statements is CORRECT?

• A) 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.
• B) Bond C sells at a premium (its price is greater than par), and its price is expected to increase over the next year.
• C) Bond A sells at a discount (its price is less than par), and its price is expected to increase over the next year.
• D) Over the next year, Bond A's price is expected to decrease, Bond B's price is expected to stay the same, and Bond C's price is expected to increase.
• E) Bond A's current yield will increase each year.

---

Definitions:

Income Summary

An account used in the closing process that summarizes the revenues and expenses for a specific accounting period before transferring the net income to retained earnings.

Net Income

Final earnings of a corporation post deductions of expenses and taxes from its aggregate revenue.

Revenues

Income generated from normal business operations, including sales of goods and services, fees, commissions, and other sources.

Expenses

Costs incurred in the process of earning revenue, encompassing a broad range of spending from operational to administrative.