You Are Considering Three Different Bonds for Your Portfolio

question 80

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.

Understand the impact of demographic changes on government spending.

Comprehend the types of taxes, including excise, individual income, and corporate taxes, and their effects on the economy.

Analyze the reasons for projected increases in government spending, particularly related to Social Security, Medicare, and healthcare.

Recognize the role of social insurance taxes and their earmarking for social programs.

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Definitions:

Functional Fixedness

A cognitive bias that limits a person's ability to use an object only in the way it is traditionally used, hindering creative problem-solving.

Mental Sets

A tendency to approach situations or problems in a particular way, often based on past experiences or learned procedures.

Problem Solving

The process of identifying a problem, generating possible solutions, and selecting the best course of action among them.

Spare Tyre

A colloquial term for an additional tyre carried in a vehicle for use in the case of a flat tyre or blowout.