Which of the following statements is CORRECT? If a 10-year, $1,000 par, zero cou

Question

Which of the following statements is CORRECT?

If a 10-year, $1,000 par, zero coupon bond were issued at a price that gave investors a 10% yield to maturity, and if interest rates then dropped to the point where rd = YTM = 5%, the bond would sell at a premium over its $1,000 par value.

If a 10-year, $1,000 par, 10% coupon bond were issued at par, and if interest rates then dropped to the point where rd
= YTM = 5%, we could be sure that the bond would sell at a premium above its $1,000 par value.

Other things held constant, a corporation would rather issue noncallable bonds than callable bonds.

Other things held constant, a callable bond would have a lower required rate of return than a noncallable bond.

Reinvestment rate risk is worse from an investor

Explanation / Answer

If a 10-year, $1,000 par, 10% coupon bond were issued at par, and if interest rates then dropped to the point where rd = YTM = 5%, we could be sure that the bond would sell at a premium above its $1,000 par value.

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