Consider each of the following bonds:
Bond A:8-year maturity with a 7% annual coupon.
Bond B:10-year maturity with a 9% annual coupon.
Bond C:12-year maturity with a zero coupon.
Each bond has a face value of $1,000 and a yield to maturity of 8%.Which of the following statements is NOT correct?
A)Bond A sells at a discount, while Bond B sells at a premium.
B)If the yield to maturity on each bond falls to 7%, Bond C will have the largest percentage increase in its price.
C)Bond C has the most reinvestment risk.
D)Bond C has the most price risk.
E)If the yield to maturity is constant, the price of Bond A will continue to increase over its life until it finally sells at par.

Question

Quizplus · Accepted Answer

Bond C has no coupon payments, therefore it does not have any reinvestment risk. The correct statement would be that Bond A has the most reinvestment risk, as it has coupon payments that need to be reinvested at the prevailing interest rates, which may be lower than the yield to maturity.

Consider Each of the Following Bonds