Question

A bond has an 8 percent annual coupon and a yield to maturity equal to 7.5 percent. Which of the following statements is most correct?

a. If the yield to maturity remains constant, the price of the bond is expected to increase over time.

b. The bond has a current yield greater than 8 percent.

c. If the bond is callable, the YTM is a better estimate of this bond’s expected return.

d. The bond price will decrease when there is an increase in required discount rate.

e. The bond sells at a price below par.

Answer 1

Option D is correct. The bond price will decrease when there is an increase in required discount rate.

The Required Rate of return and the Price of the Bond has the inverese relationship i.e. If the Yield to Maturity increase the Price of the Bond will decrease and veice- versa. So, here the Bond Price will decrease when there is an increase in required discount Rate i.e. yield to maturity.

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