You Are Considering Three Different Bonds for Your Portfolio

question 5

Multiple Choice

You are considering three different bonds for your portfolio.Each bond has a 10-year maturity and a yield to maturity of 10%.Bond X has an 8% annual coupon, Bond Y has a 10% annual coupon, and Bond Z has a 12% annual coupon.Which of the following statements is CORRECT?

• A) Bond X has the greatest reinvestment rate risk.
• B) If market interest rates decline, all of the bonds will have an increase in price, and Bond Z will have the largest percentage increase in price.
• C) If market interest rates remain at 10%, Bond Z's price will be 10% higher one year from today.
• D) If market interest rates increase, Bond X's price will increase, Bond Z's price will decline, and Bond Y's price will remain the same.
• E) If the bonds' market interest rates remain at 10%, Bond Z's price will be lower one year from now than it is today.

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Definitions:

Third Quartile

The value that divides the top 25% of a data set from the bottom 75%, often used as a measure of data spread.

Quartile

A type of quantile which divides the range of a probability distribution into four intervals of equal probability, used in describing the spread of a dataset.

GMT

Greenwich Mean Time, the mean solar time at the Prime Meridian in Greenwich, London, used as a global time standard.

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