The YTMs of Three $1,000 Face Value Bonds That Mature

question 89

Multiple Choice

The YTMs of three $1,000 face value bonds that mature in 10 years and have the same level of risk are equal. Bond A has an 8% annual coupon, Bond B has a 10% annual coupon, and Bond C has a 12% annual coupon. Bond B sells at par. Assuming interest rates remain constant for the next 10 years, which of the following statements is CORRECT?

• A) since the bonds have the same ytm, they should all have the same price, and since interest rates are not expected to change, their prices should all remain at their current levels until maturity.
• B) bond c sells at a premium (its price is greater than par), and its price is expected to increase over the next year.
• C) bond a sells at a discount (its price is less than par), and its price is expected to increase over the next year.
• D) over the next year, bond a's price is expected to decrease, bond b's price is expected to stay the same, and bond c's price is expected to increase.
• E) bond a's current yield will increase each year.

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Definitions:

Alternation of Generations

A lifecycle in certain plants and algae that alternates between a sexual phase (gametophyte) and an asexual phase (sporophyte).

Gametophytes

Gametophytes are the sexual phase in the life cycle of plants and algae, producing gametes for fertilization.

Mitosis

A type of cell division that results in two daughter cells each having the same number and kind of chromosomes as the parent nucleus, typical of ordinary tissue growth.

Meiosis

A type of cell division that reduces the chromosome number by half, resulting in the production of gametes or spores.