Question

1.As the bond approaches maturity, its value decreases until it converges toward the par value on the maturity date. True False

2.A Corporation pays a dividend of $5.00 per share to the preferred stockholders. If required return of the preferred stockholder is 8%, which of the following would be closest to this stock price? A. $58.25 B. $62.50 C. $40.00 D. $5.00

Answer 1

(1). Answer to the given above statement is TRUE

Explanations: Explanation to the given statement "As the bond approaches maturity, its value decreases until it converges toward the par value on the maturity date", is given by the concept of "Pull to Par" which gives an idea about the movement of stock prices as it reaches towards its maturity.

It states that, the discount bonds which is issued at the price lower than its facevalue(Par) will increase in price as it will reache towards its maturity. This is because odf the fact that when an investor invests in bonds they require specific return from the bond given the bond's characteristics and market condition, which describes the tendency of the bonds price to reaches towards its par value as it approaches its maturity date.

The given statement is about Premium bonds, when these types of bonds reaches to it maturity its value decreases so as to at maturity it can be equal to its par.