Corporate Bond a Returns 5 Percent of Its Cost in PV

question 24

Multiple Choice

Corporate Bond A returns 5 percent of its cost in PV terms in each of the first five years and 75 percent of its value in the sixth year. Corporate Bond B returns 8 percent of its cost in PV terms in each of the first five years and 60 percent of its cost in the sixth year. If A and B have the same required return,which of the following is/are true?
I. Bond A has a bigger coupon than Bond B.
II. Bond A has a longer duration than Bond B.
III. Bond A is less price-volatile than Bond B.
IV. Bond B has a higher PV than Bond A.

• A)III only
• B)I,III,and IV only
• C)I,II,and IV only
• D)II and IV only
• E)I,II,III,and IV

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Definitions:

Sales Tax

A tax imposed by governments on the sale of goods and services, collected by the retailer at the point of sale.

Plant Asset

Long-lived tangible assets used in the production of goods and services, such as machinery, buildings, and equipment.

Unanticipated Costs

Expenses that were not planned or predicted in the budgeting process, often leading to budget overruns.

Remodeling

The process of making improvements or alterations to a building's structure or design, often to update or increase its value.