Bonds A, B, and C All Have a Maturity of 15

question 81

Multiple Choice

Bonds A, B, and C all have a maturity of 15 years and a yield to maturity of 9%.Bond A's price exceeds its par value, Bond B's price equals its par value, and Bond C's price is less than its par value.Which of the following statements is CORRECT?

• A) Bond A has the most interest rate risk.
• B) If the yield to maturity on the three bonds remains constant, the prices of the three bonds will remain the same over the next year.
• C) If the yield to maturity on each bond increases to 8%, the prices of all three bonds will decline.
• D) Bond C sells at a premium over its par value.
• E) If the yield to maturity on each bond decreases to 6%, Bond A will have the largest percentage increase in its price.

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Definitions:

After-Tax Cost

After-tax cost refers to the expense of a transaction or investment after accounting for the effects of taxes, providing a clearer picture of the true financial impact.

Net Present Value

A method used in capital budgeting to evaluate the profitability of an investment or project, calculated as the difference between the present value of cash inflows and outflows.

Debt-Equity Ratio

A financial measure that highlights the ratio of shareholders' equity to debt in a company's capital structure, often employed to scrutinize its leverage.

Flotation Cost

The overall expenses related to the issuance of new shares or bonds, encompassing fees for underwriting, legal services, and registration.