Which of the following statement is FALSE?Group of answer choicesCoupon is the stated interest payment made on a bond.Prior to its maturity date, the price of a zero-coupon bond is always greater than its face value.Ordinary shares are generally riskier assets than bonds.When interest rates rise, bond prices fall.Short-term bonds have less interest rate risk than long-term bonds.
Question
Which of the following statement is FALSE?Group of answer choicesCoupon is the stated interest payment made on a bond.Prior to its maturity date, the price of a zero-coupon bond is always greater than its face value.Ordinary shares are generally riskier assets than bonds.When interest rates rise, bond prices fall.Short-term bonds have less interest rate risk than long-term bonds.
Solution
The statement that is FALSE is: "Prior to its maturity date, the price of a zero-coupon bond is always greater than its face value."
Here's why:
-
A coupon is indeed the stated interest payment made on a bond. This is true.
-
Prior to its maturity date, the price of a zero-coupon bond is always LESS than its face value, not greater. This is because zero-coupon bonds do not pay interest until maturity. Investors buy these bonds at a discount to their face value and receive the full face value when the bonds mature. Therefore, this statement is false.
-
Ordinary shares are generally riskier assets than bonds. This is true because shareholders are last in line to receive any remaining assets if a company goes bankrupt, while bondholders are paid before shareholders.
-
When interest rates rise, bond prices fall. This is true because the fixed interest payments of a bond become less attractive compared to other investments when interest rates rise, causing the price of the bond to fall.
-
Short-term bonds have less interest rate risk than long-term bonds. This is true because the longer the maturity of a bond, the greater the chance that interest rates might rise and negatively affect the price of the bond.
Similar Questions
Which ONE of the following statements is wholly CORRECT:Group of answer choicesZero-coupon bonds have fixed coupon rateZero-coupon bonds are sold at a price below par valueZero-coupon bonds are valued using simple interestCoupon-paying bonds are sold at a price above par value
Which of the following statement is true?Group of answer choicesCorporate bond yields are generally lower than government bond yields for bonds having the same coupon rate and maturity.Once a bond defaults, bondholders can no longer receive any residual payment from the bond.Two bonds have the same maturity, risk rating, and face value, but have different coupon rates. The bond with a lower coupon rate carries greater risks.The spread of junk bond yields over that of Australian Government Bond is generally lower than the spread of investment-grade bonds over that of the Australian Government Bond.
Which of the following statements is FALSE?a.The time remaining until the repayment date is known as the term of the bond.b.Bonds are usually less risky than shares.c.Bonds are securities sold by governments and corporations to raise money from investors today in exchange for promised future payments.d.By convention the coupon rate is expressed as an effective annual rate.e.Bonds typically make two types of payments to their holders.
If the stated rate of a bond is higher than the market interest rate:Group of answer choicesThe stated rate will increaseThe coupon payment will increaseThe bond will be priced above the face valueThe bond will trade at a discount
Which one of the following statements is true regarding bond valuation?When r is greater than coupon rate, the bond is traded at parThe interest rate (r) and a bond's market price are irrelevant to each otherWhen r increases, the market value of the bond will decreaseWhen r is higher than coupon rate, the bond is called a premium bondWhen r increases, the face value of the bond will also increase
Upgrade your grade with Knowee
Get personalized homework help. Review tough concepts in more detail, or go deeper into your topic by exploring other relevant questions.