A bond investor is analyzing the following annual coupon bonds: Annual Coupon Ra

Question

A bond investor is analyzing the following annual coupon bonds: Annual Coupon Rate Issuing Company Irwin Enterprises Johnson Incorporated Smith Metalworks 6% 12% 9% Each bond has 10 years until maturity and has the same risk. Their yield to maturity (YTM) is 9%. Interest rates are assumed to remain constant over the next 10 years. Label the curves on the following graph to indicate the path that each bond's price, or value, is expected to follow BOND VALUE I$ 1200 1100 1000 900 800 700 600 10 YEARS TO MATURITY Based on the preceding information, which of the following statements are true? Check all that apply Irwin's bonds have the highest expected total return The expected capital gains yield for Johnson's bonds is greater than 12% The expected capital gains yield for Johnson's bonds is negative The bonds have the same expected total return If a bond is selling for a price much lower than its par value, it is most likely that the bond is bond

Explanation / Answer

1.
The top curve is Johnson
The middle curve is Smith
THe bottom curve is Irwin
2.
The bonds have the same expected total return
The expecte capital gains yield for Johnson's bonds is negative
3.
zero coupon or discount or oustanding

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