three $1,000 face value bonds that mature in 10 years have the same level of ris
ID: 2671906 • Letter: T
Question
three $1,000 face value bonds that mature in 10 years have the same level of risk, hence their YTM's are equal. bond Ahas an 8% annual coupon and 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 statement is correct.a. bond A's current yeild will increase each year
b. 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.
c. Bond C sells at a premium (its price is greater than par), and its price is expected to increase over the next year.
d. Bond A sells at a discount (its price is less than par), and its price is expected to increase over the next year.
e. Over the next year, Bond A
Explanation / Answer
since the bond B sells at par therefore its coupon rate = YTM ; which is equal to 10 % thus the answer is : d. Bond A sells at a discount (its price is less than par), and its price is expected to increase over the next year. because here the coupon is less than the YTM and also the price of the bond keeps on increasing to reach to 1000 face value at maturity
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