Fins1613 Wtf (1 Viewer)

[RZ]

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% annual coupon, Bond B has a 10% annual coupon, and Bond C has a 12%
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.

answer is a and why

 

[redslert]

Bond B sells at par, since they all have the same YTM, then the YTM will be 10%.

This would mean that
A: discount bond
B: par bond
C: premium bond

So obvoiusly B is wrong because A will increase in price and C will decrease.
C is wrong because the coupon rates are different so the price of bonds are different even though YTM is the same.
D is wrong because it is selling at premium, so price will decrease till maturity.

This leaves A to be correct.

 

[Minai]

Just remember the graphs that Zhian drew in lectures