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

Question

Quizplus · Accepted Answer

This statement is true as long as the bond's required return remains constant (i.e. there is no change in market interest rates). When a bond approaches its maturity date, its price should converge to its par value because the only remaining cash flow is the final coupon payment and the repayment of the face value at maturity, both of which are fixed.

Which of the Following Statements Is CORRECT