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b. A callable 10-year, 10% bond should sell at a higher price than an
otherwise similar noncallable bond.
c. Corporate treasurers dislike issuing callable bonds because these
bonds may require the company to raise additional funds earlier than
would be true if noncallable bonds with the same maturity were used.
d. 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
above the coupon rate than if it is below the coupon rate.
e. The actual life of a callable bond will always be equal to or less than
the actual life of a noncallable bond with the same maturity. Therefore,
if the yield curve is upward sloping, the required rate of return will be
lower on the callable bond.
3. Which of the following statements is CORRECT?
a. Assume that two bonds have equal maturities and are of equal risk,
but one bond sells at par while the other sells at a premium above par.
The premium bond must have a lower current yield and a higher capital
gains yield than the par bond.
b. A bond’s current yield must always be either equal to its yield to
maturity or between its yield to maturity and its coupon rate.
c. If a bond sells at par, then its current yield will be less than its yield to
maturity.
d. If a bond sells for less than par, then its yield to maturity is less than
its coupon rate.
e. A discount bond’s price declines each year until it matures, when its
value equals its par value.