Which of the following statements is CORRECT?
A)If the Federal Reserve unexpectedly announces that it expects inflation to increase, then we would probably observe an immediate increase in bond prices.
B)The total yield on a bond is derived from dividends plus changes in the price of the bond.
C)Bonds are riskier than common stocks and therefore have higher required returns.
D)Bonds issued by larger companies always have lower yields to maturity (less risk) than bonds issued by smaller companies.
E)The market value of a bond will always approach its par value as its maturity date approaches, provided the bond's required return remains constant.

Question

Quizplus · Accepted Answer

As the bond approaches maturity, the remaining time to receive the fixed interest payments decreases, which makes the bond's cash flows more certain. This certainty leads to a decrease in required return, which leads to an increase in bond price. As a result, the market value of a bond will approach its par value as its maturity date approaches, provided the bond's required return remains constant.

Which of the Following Statements Is CORRECT