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(Solved): Which of the following statements is CORRECT? If a bond is selling at a discount to par, its curren ...




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Which of the following statements is CORRECT? If a bond is selling at a discount to par, its current yield will be greater than its yield to maturity. All else equal, bonds with longer maturities have less price risk than bonds with shorter maturities. If a bond is selling at its par value, its current yield equals its capital gains yield. If a bond is selling at a premium, its current yield will be less than its capital gains yield. The real risk-free rate of interest is expected to remain constant at for the foreseeable future. However, inflation is expected to increase steadily over the next 30 years, so the Treasury yield curve has an upward slope. Assume that the pure expectations theory holds. You are also considering two corporate bonds, one with a 5-year maturity and one with a 10-year maturity. Both have the same default and liquidity risks. Given these assumptions, which of these statements is CORRECT? Since the pure expectations theory holds, the 10-year corporate bond must have the same yield as the 5-year corporate bond. Since the pure expectations theory holds, all 5-year Treasury bonds must have higher yields than all 10-year Treasury bonds. Since the pure expectations theory holds, all 10-year corporate bonds must have the same yield as 10-year Treasury bonds. The 10-year Treasury bond must have a higher yield than the 5-year corporate bond.


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