Three $1,000 face value,10-year,noncallable,bonds have the same amount of risk,hence their YTMs are equal.Bond 8 has an 8% annual coupon,Bond 10 has a 10% annual coupon,and Bond 12 has a 12% annual coupon.Bond 10 sells at par.Assuming that interest rates remain constant for the next 10 years,which of the following statements is CORRECT?
A) Bond 8's current yield will increase each year.
B) 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.
C) Bond 12 sells at a premium (its price is greater than par),and its price is expected to increase over the next year.
D) Bond 8 sells at a discount (its price is less than par),and its price is expected to increase over the next year.
E) Over the next year,Bond 8's price is expected to decrease,Bond 10's price is expected to stay the same,and Bond 12's price is expected to increase.

Question

Quizplus · Accepted Answer

Note that Bond 10 sells at par,so the required return on all these bonds is 10%.Bond 10's price will remain constant;Bond 8 will sell initially at a discount and will rise,and Bond 12 will sell initially at a premium and will decline.Note too that since it has larger cash flows from its higher coupons,Bond 12 would be less sensitive to interest rate changes (i.e. ,it has less price risk.It has more default risk).

Three $1,000 Face Value,10-Year,noncallable,bonds Have the Same Amount of Risk,hence