Three $1,000 face value bonds that mature in 10 years have the same level of risk,hence their YTMs are equal.Bond 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 statement about these bonds is true?

Question

Quizplus · Accepted Answer

Bond A has a lower coupon rate than the YTM, so it sells at a discount. As interest rates remain constant, the price of Bond A is expected to increase over the next year until it reaches its par value at maturity. Bond B has a coupon rate equal to the YTM, so it sells at par and its price is expected to remain the same over the next year. Bond C has a higher coupon rate than the YTM, so it sells at a premium. Its price is not expected to increase further over the next year, and may even decrease if interest rates rise. Therefore, only choice C is correct.

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