10. Bond yields and prices over time Aa Aa A bond investor is analyzing the following annual coupon bonds: Issuing Company Annual Coupon Rate Smith Enterprises 6% Irwin Incorporated 12% 9% Johnson Metalworks Each bond has 10 years until maturity and has the same risk. Their yield to maturity (YTM) is 9%. Interest rates are assumed to remain constant over the next 10 years. Label the curves on the following graph to indicate the path that each bond's price, or value, is expected to follow. BOND VALUE ($ 1200 1100 1000 900 800 700 600 10 8 0 4 2 YEARS TO MATURITY Based on the preceding information, which of the following statements are true? Check all that apply. The expected capital gains yield for Smith's bonds is positive. Johnson's bonds are a better investment than Irwin's bonds. Irwin's bonds are a better investment than Smith's bonds. All of the bonds will have the same value when they reach maturity Smith just registered and issued its bonds, which will be sold in the bond market for the first time. Smith's bonds would be referred to as The higher the risk of a security, the higher its expected return will be. A bond's risk level is reflected in its yield, but understanding the different risks involved when investing in bonds is important The following graph shows the relationship between interest rates and maturity for three security classes: U.S Treasury securities (USTS), AA-rated corporate bonds, and BBB-rated corporate bonds. Use the dropdown menus to label each security's profile correctly: YIELD (%) 15 12 9 6 3 10 20 30 15 25 YEARS TO MATURITY Which type of bonds offer a higher yield? O Noncallable bonds O Callable bonds Answer the following question based on your understanding of interest rate risk and reinvestment rate risk True or False: Assuming all else is equal, short-term securities are exposed to higher reinvestment rate risk than long-term securities. O True OFalse