Corporate Bond a Returns 5 Percent of Its Cost in PV

question 4

Multiple Choice

Corporate Bond A returns 5 percent of its cost in PV terms in each of the first five years and 75 percent of its value in the sixth year. Corporate Bond B returns 8 percent of its cost in PV terms in each of the first five years and 60 percent of its cost in the sixth year. If A and B have the same required return,which of the following is/are true?
I. Bond A has a bigger coupon than Bond B.
II. Bond A has a longer duration than Bond B.
III. Bond A is less price-volatile than Bond B.
IV. Bond B has a higher FPV than Bond A.

• A) III only
• B) I,III,and IV only
• C) I,II,and IV only
• D) II and IV only
• E) I,II,III,and IV

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Definitions:

Special-Interest Effect

The phenomenon where policy decisions are influenced or determined by the lobbying power of a small, focused group rather than the interests of the larger public.

Agriculture

The science, art, and practice of cultivating plants and livestock.

Legislators

Elected officials responsible for making or amending laws within a government.

Food, Conservation, And Energy Act

A comprehensive farm bill that covers policies affecting food production, conservation measures, and energy consumption.