The YTMs of three $1,000 face value bonds that mature in 10 years and have the same level of risk 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 of the following statements is CORRECT?

Question

Quizplus · Accepted Answer

Note that Bond B sells at par, so the required return on all these bonds is 10%. B's price will remain constant; A will sell initially at a discount and will rise, and C will sell initially at a premium and will decline. Note too that since it has larger cash flows from its higher coupons, Bond C would be less sensitive to interest rate changes; i.e., it has less interest rate risk. Perhaps it has less default risk.

The YTMs of Three $1,000 Face Value Bonds That Mature