A 10-year annual coupon bond was issued four years ago at par. Since then the bo
ID: 2792309 • Letter: A
Question
A 10-year annual coupon bond was issued four years ago at par. Since then the bond's yield to maturity (YTM) has decreased from 9% to 7%. Which of the following statements is true about the current market price of the bond?
The bond is selling at a discount
The bond is selling at par
The bond is selling at a premium
The bond is selling at book value
Insufficient information
2) A company is trying to decide between two independent projects. Each project has a cost of capital of 12%. Project A has an IRR of 11.4%. Project B has an IRR of 11.1%. Which project should the company choose if the goal of the firm is to maximize shareholder wealth?
Project
Project B
Both projects should be chosen
Neither project should be chosen
aThe bond is selling at a discount
bThe bond is selling at par
cThe bond is selling at a premium
dThe bond is selling at book value
eInsufficient information
Explanation / Answer
Bond prices and yield has inverse relationship. If yield decrease, bond price will increase and vice-versa. Here, yield decreased, so bond price will increase.
Hence, correct option is (a) The bond is selling at a discount.
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