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.

---

Definitions:

Risk-Free Rate

The rate of return on an investment with no risk of financial loss, often represented by the yield on government securities.

Evolution of Beta

The changes in Beta over time, reflecting how a security's volatility relative to the market can vary with different market conditions or company developments.

Forecast

Prediction or estimation of future events or trends, especially regarding economics or weather.

Forecasted Market Return

An estimation of the future returns that will be generated by the market over a specific period.