Bond a Has a 9% Annual Coupon While Bond B

question 8

Multiple Choice

Bond A has a 9% annual coupon while Bond B has a 6% annual coupon. Both bonds have a 7% yield to maturity, and the YTM is expected to remain constant. Which of the following statements is CORRECT?

• A) the prices of both bonds will remain unchanged.
• B) the price of bond a will decrease over time, but the price of bond b will increase over time.
• C) the prices of both bonds will increase by 7% per year.
• D) the prices of both bonds will increase over time, but the price of bond a will increase by more.
• E) the price of bond b will decrease over time, but the price of bond a will increase over time.

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Definitions:

Elastic Market Demand

Describes a market situation where the quantity demanded of a good or service significantly responds to changes in its price.

Perfectly Elastic Demand

Perfectly elastic demand is a market scenario where the demand for a product can drastically change (increase or decrease) at the slightest change in price, essentially to infinity.

Patents

Legal documents granted by the government giving an inventor exclusive rights to manufacture, use, or sell an invention for a certain number of years.

Innovation Incentives

Mechanisms or policies designed to encourage the development and implementation of new ideas, products, or methodologies.