1. When interest rates are low, which of the following bonds is most likely to b
ID: 2806249 • Letter: 1
Question
1. When interest rates are low, which of the following bonds is most likely to be called?
a) Par bonds
b) Premium bonds
c) Discount bonds
d) Zero coupon bonds
2. Holding other factors constant, the interest rate risk of a coupon bond is higher when the bond's:
A) term-to-maturity is lower.
B) coupon rate is higher.
C) yield to maturity is lower.
D) current yield is higher.
3. Market economists all predict a rise in interest rates. An astute bond manager wishing to maximize her capital gain might employ which strategy?
A) Switch from low duration to high duration bonds.
B) Switch from high duration to low duration bonds.
C) Switch from high grade to low grade bonds.
D) Switch from low coupon to high coupon bonds.
Explanation / Answer
1.
Premium bonds
In this case bonds are issued and sold at price above the par value, which is called as premium. It could only be happened if the market interest rate is low; on that time the bond’s coupon rate will be attractive enough in the market to go for premium issue.
Answer: b
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