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a. The bond s expected capital gains yield is zero. b. The bond s yield to maturity is above 9%. c. The bond s current yield is above 9%. d. If the bond s yield to maturity declines, the bond will sell at a discount. e. The bond s current yield is less than its expected capital gains yield. 30. If the Federal Reserve unexpectedly announces that it expects inflation to increase, then we would probably observe an immediate increase in bond prices. The total yield on a bond is derived from dividends plus changes in the price of the bond. Bonds are riskier than common stocks and therefore have higher required returns. Bonds issued by larger companies always have lower yields to maturity (less risk) than bonds issued by smaller companies. The market value of a bond will always approach its par value as its maturity date approaches, provided the bond’s required return remains constant. =============================================== FIN 534 Week 5 Chapter 8 Solution