2 a. The yield to maturity on a bond is fixed in the indenture is lower for high

Question

2

a.

The yield to maturity on a bond

is fixed in the indenture

is lower for higher risk bonds

is the required rate of return for bonds

is generally equal to the coupon interest rate

V. None of the options specified here

b.

Benjamin Corp. bonds pays an annual coupon rate of 10% on a face value of $1,000. If investors' requiredrate of return is now 8% on these bonds, they will be priced at:

par value, which means market price equals face value

a premium over par value, which means market price will be higher than face value

a discount to par value, which means market price will be less than face value

can be at a premium or disount from face value

None of the options specified here   

c.

A bond will sell at a discount (below par value) if:

if the required rate of return is less than the coupon rate of the bond

if the coupon rate of the bond is more than the required rate of return of the bond

required rate of return equals coupon rate of the bond

required rate of return is higher than the coupon rate of the bond

None of the options specified here

d.

If market interest rates ______, bond prices _________.

I. increase; increase

II. increase; decline

III. decline; decline

IV. decline; increase

I.

is fixed in the indenture

II.

is lower for higher risk bonds

III.

is the required rate of return for bonds

IV.

is generally equal to the coupon interest rate

V. None of the options specified here

b.

Benjamin Corp. bonds pays an annual coupon rate of 10% on a face value of $1,000. If investors' requiredrate of return is now 8% on these bonds, they will be priced at:

I.

par value, which means market price equals face value

II.

a premium over par value, which means market price will be higher than face value

III.

a discount to par value, which means market price will be less than face value

IV.

can be at a premium or disount from face value

None of the options specified here   

c.

A bond will sell at a discount (below par value) if:

I.

if the required rate of return is less than the coupon rate of the bond

II.

if the coupon rate of the bond is more than the required rate of return of the bond

III.

required rate of return equals coupon rate of the bond

IV.

required rate of return is higher than the coupon rate of the bond

None of the options specified here

d.

If market interest rates ______, bond prices _________.

I. increase; increase

II. increase; decline

III. decline; decline

IV. decline; increase

Explanation / Answer

1.

The yield to maturity on a bond is defined as the required rate of return for bonds if investor hold the bond till maturity.

Option (C) is correct answer.

2.

The relationship between bond price and Yield to maturity is an inverse relationship. That is when YTM increases bond price decreases and when YTM decreases. Bond price increases. Coupon rate on bond is 10% and Current Market rate is 8%. Since, current market rate is lower than coupon rate, so bond is trading at premium, which means market price will be higher than face value.

Option (B) is correct answer.

3.

The relationship between bond price and Yield to maturity is an inverse relationship. That is when YTM increases bond price decreases and when YTM decreases. Bond price increases. So, A bond will sell at a discount (below par value) if the coupon rate of the bond is more than the required rate of return of the bond

Option (B) is correct answer.

4.

If market interest rates Increase bond prices decline. and if market rate decline then bond price increase.

Option (B) and (D) is correct answer.

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