Which of the following statements is NOT CORRECT? a. When a bond's coupon interest rate is...

Which of the following statements is NOT CORRECT?

a. When a bond's coupon interest rate is less than the market interest rate, the bond will sell at a value less than its par value and is known as a discount bond.

b. Bonds are basically loans, so they usually make regular interest payments to the bondholders. The percentage of this interest payment relative to the bond's face value is called the coupon interest rate.

c. For a fixed-rate bond, the coupon interest rate is set for the life of the bond. Unlike a fixed-rate bond's coupon interest rate, the market interest rate changes throughout the life of the bond and has a huge impact on the bond's price.

d. When the market interest rate is higher than the coupon interest rate, the bond price rises above the par value and is called a premium bond.

e. When a bond's coupon rate is equal to the market interest rate, the bond will sell for its face value, or what is known as selling at par.

Solutions

Expert Solution

When market interest rate (say 10%) is greater than the coupon interest rate of the bond (say 8%), the bond price will drop as investors would otherwise invest in the higher yielding assets. With bond price declining below par value (known as discount bond), the effective interest rate earned by an investor will be higher than the coupon rate (of 8%). Hence, option A is the correct answer.

On the other hand, if market interest rate is less than coupon interest rate, bond prices will increase and trade at a premium to par value (known as premium bond). If coupon rate = market rate, the bond will trade at par value.

c) Bond price is inversely related to interest rates, and as rates change, so do bond prices.

jeff jeffy answered 2 years ago

Next > < Previous

Related Solutions

which of the following statements is incorrect (least correct)? A. if the discount (or interest) rate...

which of the following statements is incorrect (least correct)? A. if the discount (or interest) rate is positive, the future value of an expected series of payments will always exceed the presents value if the same series. B. Disregarding risk, if money has time value, it is impossible for the present value of a given sum to be greater than its future value. C. Disregarding risks, if the present value of a sum is equal To ITs future value, either...

Which ONE of the following statements is wholly CORRECT: a. Zero-coupon bonds have fixed coupon rate....

Which ONE of the following statements is wholly CORRECT: a. Zero-coupon bonds have fixed coupon rate. b. Zero coupon bonds are sold at a price above par value. c. None of the answers are correct. d. Zero-coupon bonds are sold at a price below par value. e. Zero-coupon bonds are valued using simple interest.

3. Which of the following statements is (are) correct? (x) If at some specific interest rate...

3. Which of the following statements is (are) correct? (x) If at some specific interest rate the quantity of money demanded is more than the quantity of money supplied, people will desire to sell interest-earning assets causing the interest rate to increase. (y) Ceteris paribus, as the price of bonds falls, the interest rate on bonds falls. (z) A decrease in the interest rate induces firms to borrow more, which will result in more investment spending and an increase in...

Which of the following statements regarding risk is(are) CORRECT? I. Interest rate risk is the variability...

Which of the following statements regarding risk is(are) CORRECT? I. Interest rate risk is the variability of a security’s returns resulting from changes in interest rates. II. Inflation risk, or purchasing power risk, is the variability of security returns caused by the decline in the purchasing power of invested dollars. I only II only Both I and II Neither I nor II

Which of the following statements is/are correct? 1. The principal but not the interest to be...

Which of the following statements is/are correct? 1. The principal but not the interest to be paid this year on a 30-year mortgage is properly classified on the Statement of Financial Position as a current liability. 2. A CD with a maturity of 9-months is classified as an investment asset on the Statement of Financial Position. Select one: a. a. 1 only. b. b. 2 only. c. c. Both 1 and 2. d. d. Neither 1 nor 2....

Which of the following statements is not correct? a. The modified internal rate of return is...

Which of the following statements is not correct? a. The modified internal rate of return is similar to the realized compound yield method used with bonds. b. The modified internal rate of return attempts to correct the reinvestment rate assumption implicit with the internal rate of return method. c. The modified internal rate of return takes the outflows back to the present time and the inflows to the terminus of the project. d. The modified internal rate of return solves...

Which of the following statements is NOT CORRECT? a. When a corporation's shares are owned by...

Which of the following statements is NOT CORRECT? a. When a corporation's shares are owned by a few individuals, we say that the firm is "closely, or privately, held." b. When stock in a closely held corporation is offered to the public for the first time, the transaction is called "going public, or an IPO," and the market for such stock is called the new issue or IPO market. c. It is possible for a firm to go public and...

Which of the following presents the correct relationship? As the coupon rate of a bond increases,...

Which of the following presents the correct relationship? As the coupon rate of a bond increases, the bond's: a. face value increases b. current price decreases c. interest payments increase d. maturity date is extended EXPLAIN WHY ANSWER IS CORRECT AND WHY OTHERS ARE INCORRECT

Which of the following statements is (are) correct?

10. which of the following statements is (are) correct?(x) When the government runs a budget deficit, investment is lower than it would be otherwise because interest rates are higher than they would be otherwise.(y) A reduction in the budget deficit would cause a shortage of loanable funds at the original interest rate, and as a result, interest rates would rise.(z) When the government runs a budget deficit, national saving is higher than it would be otherwise.A. (x), (y) and (z)B....

Which of the following statements is NOT CORRECT?

‏____ Which of the following statements is NOT CORRECT? a. When a corporation's shares are owned by a few individuals and are not traded on public markets, we say that the firm is "closely, or privately, held." b. "Going public" establishes a firm's true intrinsic value, and it also insures that a highly liquid market will always exist for the firm's shares. c. When stock in a closely held corporation is offered to the public for the first time, the...

Subjects