Which one of the following statements about bonds is correct?Group of answer choicesThe yield on a bond for a bond investor is generally a fixed rate.Bond prices vary inversely with interest rates.Most bonds pay interest annually.Bond coupon rates vary with interest rates.
Question
Which one of the following statements about bonds is correct?Group of answer choicesThe yield on a bond for a bond investor is generally a fixed rate.Bond prices vary inversely with interest rates.Most bonds pay interest annually.Bond coupon rates vary with interest rates.
Solution
The correct statement about bonds is: Bond prices vary inversely with interest rates.
Here's why:
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When interest rates rise, the price of existing bonds fall. This is because new bonds are issued at the higher interest rate, making the older (lower interest rate) bonds less attractive.
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Conversely, when interest rates fall, the price of existing bonds rise. This is because new bonds are issued at the lower interest rate, making the older (higher interest rate) bonds more attractive.
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Therefore, bond prices and interest rates move in opposite directions, or vary inversely.
The other statements are generally incorrect:
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The yield on a bond for a bond investor is not generally a fixed rate. It can change based on the bond's price and interest rate environment.
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Most bonds do not pay interest annually. They typically pay interest semi-annually, although it can vary.
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Bond coupon rates do not vary with interest rates. The coupon rate is set when the bond is issued and does not change. However, the bond's yield to maturity will change with interest rates.
Similar Questions
Which one of the following statements is NOT true?Group of answer choicesThe yield to maturity of a bond is the discount rate that makes the present value of the coupon and principal payments equal to the price of the bond.A bond's yield to maturity changes daily as interest rates increase or decrease.The realised yield is the yield that the investor earns if the bond is held to maturity, and all the coupon and principal payments are made as promised.The yield to maturity is the yield that the investor earns if the bond is held to maturity, and all the coupon and principal payments are made as promised.The term structure of interest rates shows the relationship between the yield to maturity and time to maturity.
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 is true as it relates to bonds?Multiple ChoiceThe market interest rate is used to calculate the cash interest payments produced by the bond and the yield is used to determine the present value of a bondThe yield is used to calculate the cash interest payments produced by the bond and the contract interest rate is used to determine the present value of a bondThe yield is used to determine the present value of a bond and the contract rate is used to calculate the cash interest paymentsNone of these choices are correctThe coupon rate is used to calculate the cash interest payments produced by the bond and the nominal rate is used to determine the present value of a bond
Which of the following is correct for a bond investor whose bond offers a 5% current yield and an 8% yield to maturity?Select one:a.The bond is selling at a discount to par value.b.The bond has a high default premium.c.The promised yield is not likely to materialize.d.The bond must be a Treasury Inflation-Protected Security.
A bond that is held to maturity A. will necessarily have a yield to maturity equal to the coupon rate. B. will necessarily earn the yield to maturity at the time of purchase. C. may earn more or less that its yield to maturity at the time of purchase because the rate at which coupons can be reinvested may change. D. will earn the yield to maturity at the date of maturity.
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