Question 17 The YTM of a bond will always be higher than the bond\'s (promised)

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Question 17 The YTM of a bond will always be higher than the bond's (promised) coupon rate. Not yet answered Select one O True O False Points out of 1 Flog question Question 18 Not yet answered A callable bond is likely to be called (or redeemed) when Select one: Points out of 1 O a. Interest rates in the econamy decrease O b. Interest rates in the economy increase O c. Infiation rate in the economy decreases O d. Inflation rate in the economy increases Flog question Question 19 Not yet The pre-emptive right of common stock holders refers to the right to Select one: Points out of1 0 a. have dividends before the preferred stockholders O b, buy company shares at a tixed price (below the current market price) queston c.buy company shares betore they are offered to the market Quesson 20 Not yet Points out of 1 The complete measure of return from bond investment is given by the Select one O a. bond's coupon rate of interest O b. bond's capital gain Oc bond's yield to maturity 21 As discount rate increases, the present value of a given sum of money to be received at a future Not yel Select one

Explanation / Answer

Question no. 17: FALSE : YTM is not always greater than coupon rate.

Logic: If a bond's coupon rate is less than its YTM, then the bond is selling at a discount. If a bond's coupon rate is more than its YTM, then the bond is selling at a premium. If a bond's coupon rate is equal to its YTM, then the bond is selling at par.

Question no 18: A callable bond is likely to be redeemed if interest rate is the economy decreases ( A option)

Reason: Callable bonds have two potential life spans, one ending at the original maturity date and the other at the "callable date."

At the callable date, the issuer may "recall" the bonds from its investors. This simply means the issuer retires (or pays off) the bond by returning the investors' money. Whether or not this occurs is a factor of the interest rate environment.

Consider the example of a 30-year callable bond issued with a coupon of 7% that is callable after five years. Assume that five years later interest rates for new 30-year bonds are 5%. In this instance, the issuer would recall the bonds because the debt could be refinanced at a lower interest rate. Conversely, if rates moved to 10% the issuer would do nothing, as the bond is relatively cheap compared to market rates.

Question no 19: C point : The pre emptive right to stockholder is the right to buy companies share before they are offered to market.    

Question no 20: C point : the complete measure of return from bonds investment is given by bonds yield to maturity.

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