Asked by Maria Cazares on Jul 22, 2024
Verified
Which statement regarding bond prices is true?
A) If a coupon bond is selling at par, its current yield equals its yield to maturity.
B) If a coupon bond is selling at a discount, its price will continue to decline until it reaches its par value at maturity.
C) If interest rates increase, the price of a 10-year coupon bond will decline by a greater percentage than the price of a 10-year zero coupon bond.
D) If a bond's yield to maturity exceeds its annual coupon, then the bond will trade at a premium.
Coupon Bond
A type of bond that pays the holder periodic interest payments at a fixed rate (the coupon rate) before maturing, at which point the principal or face value is repaid.
Yield To Maturity
The total return anticipated on a bond if it is held until the maturity date, considering all interest payments and the principal repayment.
Par Value
The face value of a bond or stock as stated by the issuer, which does not necessarily reflect its market value.
- Explore the connection between market interest rates and their effect on bond prices and yields.
Verified Answer
GA
GERALDINE ARANETAJul 25, 2024
Final Answer :
A
Explanation :
When a coupon bond is selling at par, its coupon rate equals the prevailing market interest rate. Therefore, its current yield equals its yield to maturity.
Option B is incorrect because the price of a bond selling at a discount may or may not continue to decline; it depends on the prevailing interest rates and the remaining time to maturity.
Option C is incorrect because the price of a zero-coupon bond is more sensitive to changes in interest rates than the price of a coupon bond with the same time to maturity.
Option D is incorrect because if a bond's yield to maturity exceeds its annual coupon rate, then the bond will trade at a discount, not a premium.
Option B is incorrect because the price of a bond selling at a discount may or may not continue to decline; it depends on the prevailing interest rates and the remaining time to maturity.
Option C is incorrect because the price of a zero-coupon bond is more sensitive to changes in interest rates than the price of a coupon bond with the same time to maturity.
Option D is incorrect because if a bond's yield to maturity exceeds its annual coupon rate, then the bond will trade at a discount, not a premium.
Learning Objectives
- Explore the connection between market interest rates and their effect on bond prices and yields.