Bonds and their valuation (Difficulty: e = Easy, m = Medium, and t = Tough) Multiple Choice: Conceptual

b. The bond sells at a price above par.

c. If the yield to maturity remains constant, the price of the bond is expected to fall over time.

d. Statements b and c are correct.

e. All of the statements above are correct.
Bond concepts Answer: a Diff: E

¹⁶. You are considering investing in three different bonds. Each bond matures in 10 years and has a face value of $1,000. The bonds have the same level of risk, so the yield to maturity is the same for each. Bond A has an
8 percent annual coupon, Bond B has a 10 percent annual coupon, and Bond C has a 12 percent annual coupon. Bond B sells at par. Assuming that interest rates are expected to remain at their current level for the next 10 years, which of the following statements is most correct?
a. Bond A sells at a discount (its price is less than par), and its price is expected to increase over the next year.

b. Bond A’s price is expected to decrease over the next year, Bond B’s price is expected to stay the same, and Bond C’s price is expected to increase over the next year.

c. Since the bonds have the same yields to maturity, they should all have the same price, and since interest rates are not expected to change, their prices should all remain at their current levels until the bonds mature.

d. Bond C sells at a premium (its price is greater than par), and its price is expected to increase over the next year.

e. Statements b and d are correct.