FIN 534 RANK Imagine Your Future /fin534rank.com FIN 534 RANK Imagine Your Future /fin534rank.com | Page 57

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.
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,