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:

Property Taxes

Levies imposed by governmental entities based on the value of real estate or other property, used to fund public services.

Marginal Tax Rate

The rate at which an additional dollar of income is taxed, representing the percentage of tax applied to the last dollar earned.

Tax-Free

Tax-free describes goods, transactions, or income that are not subject to taxation by the government.

Taxed

Subjected to a financial charge or levy by a government on income, goods, or activities.