What Happens When a Bond's Expected Cash Flows Are Discounted

question 54

Multiple Choice

What happens when a bond's expected cash flows are discounted at a rate lower than the bond's coupon rate?

• A)The price of the bond increases
• B)The coupon rate of the bond increases
• C)The par value of the bond decreases
• D)The coupon payments will be adjusted to the new discount rate

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Definitions:

Diversifiable Risks

Risks that can be reduced or eliminated from a portfolio through diversification.

Unique Risks

Unique risks refer to the specific and individual risks that affect only a particular company, security, or investment sector, as opposed to risks that affect the entire market.

Unsystematic Risk

The risk associated with a specific company or industry, which can be reduced through diversification.

Asset-specific Risk

Refers to the risk affecting an investment's value that is associated with the particular assets the investment owns, distinct from marketwide risks.