YTMs of three $1,000 face value bonds that mature in 10 years and have the same level of risk are equalBond A has an 8% annual coupon, Bond B has a 10% annual coupon, and Bond C has a 12% annual coupon Bond B sells at par Assuming interest rates remain constant for the next 10 years, which of the following statements is CORRECT?
A) Since the bonds have the same YTM, they should all have the same price, and since interest rates are not expected to change, their prices should all remain at their current levels until maturity.
B) Bond C sells at a premium (its price is greater than par), and its price is expected to increase over the next year.
C) Bond A sells at a discount (its price is less than par), and its price is expected to increase over the next year.
D) Over the next year, Bond A's price is expected to decrease, Bond B's price is expected to stay the same, and Bond C's price is expected to increase.
E) Bond A's current yield will increase each year.

Question

Quizplus · Accepted Answer

Since all three bonds have the same YTM, their prices are not necessarily the same, and in fact, they will differ based on their coupon rates. Bond A has a lower coupon rate than Bond B and Bond C, so its price will be lower than par. Bond C has a higher coupon rate than Bond B and Bond A, so its price will be higher than par.

Since interest rates are not expected to change, the prices should remain relatively stable until maturity. Therefore, option A is incorrect. Option B is also incorrect because Bond C is already selling at a premium, so it is unlikely to increase further. Option D is incorrect because there is no reason given why any of the bond prices would change over the next year. Option E is also incorrect because current yield is the bond's annual coupon payment divided by its current market price, which will not necessarily increase each year.

YTMs of Three $1,000 Face Value Bonds That Mature in 10