Which of the Following Statements Is CORRECT

question 17

Multiple Choice

Which of the following statements is CORRECT?

• A) A 10-year, 10% coupon bond has less reinvestment rate risk than a 10-year, 5% coupon bond (assuming all else equal).
• B) The total 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.
• C) 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.
• D) 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%.
• E) 10-year, zero coupon bonds have higher reinvestment rate risk than 10-year, 10% coupon bonds.

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Definitions:

Income

The money received on a regular basis for work or through investments.

Optimal Consumption

The level of consumption at which a consumer achieves the highest possible satisfaction or utility given their income and the prices of goods and services.

Initial Endowment

The initial distribution of income, wealth, or resources among individuals or groups in an economy.

Relative Prices

The price of one good or service compared to another, often indicating their opportunity cost or trade-off.