Which of the following statements is CORRECT?
A) 10-year,zero coupon bonds have more reinvestment risk than 10-year,10% coupon bonds.
B) A 10-year,10% coupon bond has less reinvestment risk than a 10-year,5% coupon bond (assuming all else equal).
C) The total (rate of)return on a bond during a given year is the sum of the coupon interest payments received during the year and the change in the value of the bond from the beginning to the end of the year,divided by the bond's price at the beginning of the year.
D) The price of a 20-year,10% bond is less sensitive to changes in interest rates than the price of a 5-year,10% bond.
E) A $1,000 bond with $100 annual interest payments that has 5 years to maturity and is not expected to default would sell at a discount if interest rates were below 9% and at a premium if interest rates were greater than 11%.

Question

Quizplus · Accepted Answer

The total return on a bond during a given year is calculated as the sum of the coupon interest payments received during the year and the change in the value of the bond from the beginning to the end of the year, divided by the bond's price at the beginning of the year. The other options are incorrect. A is incorrect because zero coupon bonds have less reinvestment risk than coupon bonds. B is incorrect because a higher coupon rate increases reinvestment risk. D is incorrect because the price of a bond is more sensitive to changes in interest rates the longer its maturity. E is incorrect because a bond sells at a premium when its coupon rate is higher than prevailing market interest rates and sells at a discount when its coupon rate is lower than prevailing market interest rates.

Which of the Following Statements Is CORRECT