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Which one of the following is true? I. A premium bond has a coupon rate below...

Which one of the following is true? I. A premium bond has a coupon rate below market interest rate. II. As time passes, price of zero-coupon bond rises and approaches par value until maturity date. III. Market interest rate is positively associated with bond price IV. The longer the maturity of the bond, the greater the sensitivity of its price to fluctuations in the interest rate. A. I&II only B. II&IVonly C. I&IV only D. Ionly

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Answer #1

B. II & IV only

Option I is false. A premium bond has a coupon rate above market interest rate.

Option II is true. Zero coupon bond is deeply discounted and its prices increase as the bond moves towards maturity.

Option III is false. Market interest rate is negatively associated with bond price.

Option IV is true. Longer the duration of bond, higher is the duration of the bond and hence the price of that bond has higher sensitivity to change in interest rates.

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