Questions
Single choice
Which of the following statements is TRUE?[Fill in the blank]
Options
A.a. If two bonds have the same maturity and the same expected rate of return, but one has a lower coupon, the price of the low-coupon bond will be less affected by a given change in interest rates.
B.b. A growing perpetuity is a stream of cash flows that occurs at irregular intervals and grows at a constant rate forever.
C.c. If interest rates remain below the coupon rate on a bond, the bond will sell at a premium right up through its maturity. The maturity value will include the bond’s face value plus a maturity premium equal to the face value times the percentage of the bond’s life during which it sold for a premium.
D.d. All other factors held constant, the present value of a given annual annuity increases as the number of coupon payments increases.
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Step-by-Step Analysis
To tackle the question, I will examine each statement on its own terms before singling out the true one.
Option a: 'If two bonds have the same maturity and the same expected rate of return, but one has a lower coupon, the price of the low-coupon bond will be less affected by a given change in interest rates.' This is incorrect. In bond math, lower-coupon bonds typically have a longer duration than higher-coupon bonds, meaning their prices are more sensitive to interest-rate changes, not less. So the statement asserting they will be less affected is opposite to the ......Login to view full explanationLog in for full answers
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