Five years ago Rogue Construction Inc.issued 20-year maturity fixed-rate bonds at par with a 10% coupon rate.Today those same bonds carry a 14% yield to maturity.Which of the following statements about this bond issue could be true?
A)Since issue,the economy-wide rate of inflation has increased.
B)The market believes there is greater risk associated with this bond than at the issue date.
C)Both A and B may be true.
D)Neither A nor B could be true.

Question

Quizplus · Accepted Answer

If the yield to maturity has increased from 10% to 14%, it means the price of the bond has decreased. This could be due to an increase in economy-wide inflation or an increase in the perceived risk of the bond. Therefore, both options A and B could be true.

Five Years Ago Rogue Construction Inc