Question

Which of the following statements is CORRECT?

a.

The market price of a bond will always approach its par value as its maturity date approaches, provided the bond’s required return remains constant.

b.

If the Federal Reserve unexpectedly announces that it expects inflation to increase, then we would probably observe an immediate increase in bond prices.

c.

The total yield on a bond is derived from dividends plus changes in the price of the bond.

d.

Bonds are generally regarded as being riskier than common stocks, and therefore bonds have higher required returns.

e.

Bonds issued by larger companies always have lower yields to maturity (due to less risk) than bonds issued by smaller companies.

Which of the following statements is CORRECT?

a.

When large firms are in financial distress, they are almost always liquidated, whereas smaller firms are generally reorganized.

b.

The price of a discount bond will increase over time, assuming that the bond’s yield to maturity remains constant.

c.

All else equal, a bond that has a coupon rate of 10% will sell at a discount if the required return for bonds of similar risk is 8%.

d.

The total return on a bond during a given year is based only on the coupon interest payments received.

e.

For a given firm, its debentures are likely to have a lower yield to maturity than its mortgage bonds.

Answer 1

ANSWER 1: OPTION B

EXPLANATION:

If the Federal Reserve unexpectedly announces that it expects inflation to increase, then we would probably observe an immediate increase in bond prices. If inflation increases, interest rates would also increase and will lead to fall in the bond price.

ANSWER 2:OPTION B

EXPLANATION:  

The price of a discount bond will increase over time, assuming that the bond’s yield to maturity remains constant.If a bond's price is greater than the required rate of return ,it is a premium bond.

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