Question

Question 1

In terms of bonds, what is “reinvestment risk”?

a) Change in price due to changes in interest rates.

b) Risk of investing funds in debt of questionable credit quality.

c) Uncertainty concerning rates at which cash flows can be reinvested.

d) None of the above.

Question 2

If yield-to-maturity (YTM) is greater than the coupon rate (CPN) of a bond, then the bond price will be:

a) Greater than par or face value.

b) Less than par or face value.

c) Equal to par or face value.

d) Not enough information to answer the question.

Question 3

Suppose a bond is trading at a premium to par or face value. This bond’s yield-to-maturity (YTM) is:

a) Greater than the coupon rate (CPN) of the bond.

b) Less than the coupon rate (CPN) of the bond.

c) Equal to the coupon rate (CPN) of the bond.

d) Not enough information to answer the question.

Answer 1

Answer 1)

Option C is correct. Uncertainty concerning rates at which cash flows can be reinvested.

Reinvestment Risk is the risk that the Cash Flow received may be reinvested in a lower yielding security.

Answer 2)

Option B is correct.  Less than par or face value.

When the YTM > coupon rate. them the Bond will trade below par as the required rateof return is not fulfilled by the coupon rate.

Answer 3)

Option B is correct. Less than the coupon rate (CPN) of the bond.

When the YTM > coupon rate. them the Bond will trade below par as the required rateof return is not fulfilled by the coupon rate.

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