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Three $1,000 face value bonds that mature in 10 years have the same
level of risk, hence their YTMs are equal. 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 interest rates remain
constant for the next 10 years, which of the following statements is
CORRECT?
a. Bond A’s current yield will increase each year.
b. Since the bonds have the same YTM, 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 maturity.
c. Bond C sells at a premium (its price is greater than par), and its price
is expected to increase over the next year.
d. Bond A sells at a discount (its price is less than par), and its price is
expected to increase over the next year.
e. Over the next year, Bond A’s price is expected to decrease, Bond B’s
price is expected to stay the same, and Bond C’s price is expected to
increase.
2. Which of the following statements is CORRECT?
a. Two bonds have the same maturity and the same coupon rate.
However, one is callable and the other is not. The difference in prices
between the bonds will be greater if the current market interest rate is
below the coupon rate than if it is above the coupon rate.