Which of the following statements is CORRECT?
A) If the Federal Reserve unexpectedly announces that it expects inflation to increase,then we would probably observe an immediate increase in bond prices.
B) The total yield on a bond is derived from dividends plus changes in the price of the bond.
C) Bonds are generally regarded as being riskier than common stocks,and therefore bonds have higher required returns.
D) Bonds issued by larger companies always have lower yields to maturity (due to less risk)than bonds issued by smaller companies.
E) The market price of a bond will always approach its par value as its maturity date approaches,provided the bond's required return remains constant.

Question

Quizplus · Accepted Answer

As a bond approaches its maturity date, the remaining time until the bondholder receives the par value decreases, reducing the risk of holding the bond. Therefore, the market price of the bond will tend to increase and approach its par value. This is assuming that the required return, or yield to maturity, remains constant.

Which of the Following Statements Is CORRECT