Consider the Following Four Debt Securities, Which Are Identical in Every

question 20

Multiple Choice

Consider the following four debt securities, which are identical in every characteristic except as noted:
W: $\quad$ A corporate bond rated AAA
X: $\quad$ A corporate bond rated BBB
Y: $\quad$ A corporate bond rated AAA with a shorter time to maturity than bonds W and X
Z: $\quad$ ?A corporate bond rated AAA with the same time to maturity as bond Y that trades in a
More liquid market than bonds W, X, or Y

Which of the following is the most likely order of the interest rates (yields to maturity) of the bonds from highest to lowest?

• A)X, W, Y, Z
• B)W, X, Z, Y
• C)X, Y, Z, W
• D)X, Z, W, Y

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Definitions:

Annuity Due

An annuity for which the payment is due immediately at the beginning of each period, rather than at the end.

Ordinary Annuities

Identical financial amounts distributed at the termination of back-to-back periods, within a set period.

Annuities Due

An annuity for which the payment is due at the beginning of each period instead of at the end, often used in lease agreements and insurance premiums.