Which of the following statements relating to bond pricing is false? Group of answer choices An...

Which of the following statements relating to bond pricing is false?

Group of answer choices

An indenture is a legal document that spells out the contract between the bondholders and corporation.

Everything else being equal, a bond with 10 years to maturity will sell at a smaller premium or discount than a bond with 5 years to maturity.

A call option on a bond favors the firm rather than the investor.

Everything else being equal, greater differences between the coupon rate and the "required" rate will result in greater premiums or discounts.

Expert Solution

Option (a) statement is true. Indenture is an legal document which includes the terms and conditions of bonds issued and binds both the issuer and purchaser of contract. Indenture includes details of bond and responsibility of both issuer and purchaser of bonds.

Option (c) statement is true. A call option would favor more a firm as firm would call the bonds when it would benefit them rather than investors. Taking into consideration market interest condition firms would prefer to call back the bonds so that there is lower cash outflow.

Option (d) statement is true. With higher difference in coupon rate and required rate the higher would be the premium or discount on bond. With lower difference between the two the lower would be the premium or discount.

Option (b) statement is false. Bond with higher maturity period of 10 years will have higher premium or discount then bonds with maturity of less than 10 years. Increase in maturity period would lead to higher premium or discount then bonds having lower maturity period.

jeff jeffy answered 5 months ago

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