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Which of the Following Statements Is True of a Zero

Question 139

Multiple Choice

Which of the following statements is true of a zero coupon bond?

A) If a 10-year, $1,000 par, zero coupon bond were issued at a price that gave investors a 10 percent rate of return, and if interest rates then dropped to the point where rd = YTM = 5%, the borrower would exercise the call option and call in the bonds.
B) If a 10-year, $1,000 par, zero coupon bond were issued at a price that gave investors a 10 percent rate of return, and if interest rates then dropped to the point where rd = YTM = 5%, the bond's maturity value would be more than its par value.
C) If a 10-year, $1,000 par, zero coupon bond were issued at a price that gave investors a 10 percent rate of return, and if interest rates then dropped to the point where rd = YTM = 5%, the bond's maturity would increase from 10 years to 15 years.
D) If a 10-year, $1,000 par, zero coupon bond were issued at a price that gave investors a 10 percent rate of return, and if interest rates then dropped to the point where rd = YTM = 5%, the bond would sell at a premium over its $1,000 par value.
E) If a 10-year, $1,000 par, zero coupon bond were issued at a price that gave investors a 10 percent rate of return, and if interest rates then dropped to the point where rd = YTM = 5%, the bond's coupon rate would decrease from 10 percent to 5 percent.

Correct Answer: