1.Zevo Corp. bonds have a coupon rate of 7%, a yield to maturity of 10%, a face value of $1,000, and mature in 10 years. Which of the following statements is most correct?
(a)Buying the bond today will earn a return of 10% if held for the remainder of its 10-year life.
(b)Buying the bond today will earn a return of 7% if sold after one year.
(c)Buying the bond today will earn a return of 3% if held for two years.
(d)Buying the bond today will earn a return of 7% if held until it matures.
(a)Buying the bond today will earn a return of 10% if held for the remainder of its 10-year life.
A bond's coupon rate is the actual amount of interest income earned on the bond each year based on its face value.
A bond's yield to maturity (YTM) is the estimated rate of return based on the assumption that it will be held until its maturity date and not called.
In this question coupon rate is 7% and it can be earned every year depending upon the face value of the bond. The yield to maturity is 10% that will be held constant until its maturity.
Therefore it would be better to buy the bond today and held for the remaining 10 years of life to get more return rather than selling in between the maturity period.
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