7. (TCO D) a 10-year bond pays an annual coupon, its YTM is 8% and it currently

Question

7. (TCO D) a 10-year bond pays an annual coupon, its YTM is 8% and it currently trades at a premium. Which of the following statements is correct?

A)the bonds current yield is less than 8%

B)if the yield to maturity remains at 8% then the bonds price will decline over the next year

C)the bonds coupon rate is less than 8%

D)if the yield to maturity increases then the bonds price will increase

E)if the yield to maturity remains at 8% then the bonds price will remain constant over the next year

2. (TCO G) which of the following statements is correct (10 points)

A) in the statement of cash flows, a decrease in accounts receivable is reported as a use of cash.

B)dividends do not show up in the statement of cash flows because dividends are considered to be financing activity, not an operating activity.

C)in the statement of cash flows, a decrease in accounts payable is reported as a use of cash.

D)in the statement of cash flows, depreciation charges are reported as a use of cash.

E)in the statement of cash flows, a decrease in inventories is reported as a use of cash.

Explanation / Answer

1) Bonds pay coupons over time and at maturity you get your principal/par back. Coupon rates are calculated based on par. You can think of yield to maturity as the return you get by holding the bond. Since the yield is showing lower returns than what the coupon rate suggests, that must mean that the bond is trading at greater than par, and the high coupons will over time make up for that difference (the premium paid for the bond is amortized over time). The bond would eventually trade towards its par as the "extra 1% coupon juice" gets extracted over time, so the correct answer would be #4.

(2)

From above explaination it folows that the correct opton is

D)in the statement of cash flows, depreciation charges are reported as a use of cash.

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