QUESTION 7 1 points Save Answer You are considering 2 bonds that will be issued

Question

QUESTION 7 1 points Save Answer You are considering 2 bonds that will be issued tomorrow. Both are rated triple B (BBB, the lowest investment-grade rating), both mature in 20 years, both have a 10% coupon, neither can be called except for sinking fund purposes, and both are offered to you at their $1,000 par values. However, Bond SF has a smkngfun while Bond NSF does not. Under the sinking fund, the company must call and pay off 5% of the bonds at par each year. The yield curve at the time is upward sloping. The bond's prices, being equal, are probably not in equilibrium, as Bond SF, which has the sinking fund, would generally be expected to have a higher yield than Bond NSF. True O False QUESTION 8 1 points Save Answer The market value of any real or financial asset, including stocks, bonds, or art work purchased in hope of selling it at a profit, may be estimated by determining future cash flows and then discounting them back to the present. O True False QUESTION 9 1 points Save Answer If the required rate of return on a bond (ra) is greater than its coupon interest rate and will remain above that rate, then the market value of the bond will always be below its par value until the bond matures, at which time its market value will equal its par value. (Accrued interest between interest payment dates should not be considered when answering this question.) True False

Explanation / Answer

7.

A sinking fund bond has higher risk than non sinking fund bond. So required return that si yield on sinking fund bond is higehr than non sinking fund bond.

Statement is true.

8

Market value of any financial assets is determined by discounting the future cash flow generated by that assets.

statement is true.

9.

The relationship between price of bond and market interest rate is inverse. That is when interest rate rise, price of bond decrease and when interest rate falls bond price increase. This is because fixed coupon rate. So if interest rate fall even the bondholder gets the fixed coupon payment so overall value of bond increase. Similarly, when interest rate rises even the bond holder gets the coupon rate at same rate so overall bond price fall.

statement is true.

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