Question
Today, suppose you can either purchase SnG bonds or bonds issued by Sterling Corp., which have an annual coupon rate of 10%. Both SnG and
Today, suppose you can either purchase SnG bonds or bonds issued by Sterling Corp., which have an annual coupon rate of 10%. Both SnG and Sterling bonds have the same time-to-maturity of two years, make semi-annual coupon payments, and have the same yield-to-maturity of 12% (APR, semi-annually compounded). If you expect that interest rates will decrease, which of the following statements are wrong?
a. Compared to Sterling bonds, SnG bonds have higher interest rate risk because their coupon rates are higher.
b. Compared to Sterling bonds, SnG bonds have higher default risk because their coupon rates are higher.
c. Lower future interest rates can be inferred from an upward sloping yield curve.
d. You should buy neither of their bonds now, because bond prices will fall if interest rates decrease
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