CFA Practice Question

There are 490 practice questions for this study session.

CFA Practice Question

Which of the following statements is (are) true with respect to bond valuation?

I. Spot rates are equal to the yield to maturity of on-the-run coupon-paying Treasury securities.
II. The arbitrage-free valuation approach discounts each cash flow of a bond using a different discount rate.
III. As the required yield to maturity increases, the discount on a zero-coupon bond will decrease.
IV. If the yield to maturity on a bond is greater than its coupon rate, the bond will trade below par.
A. II and IV
B. II and III
C. I, III, and IV
Explanation: I is incorrect. Spot rates are equal to the yield to maturity of on-the-run zero-coupon Treasury securities.

III is incorrect. As the required yield to maturity increases, the discount on a zero-coupon bond will become even greater. The larger the discount a bond is trading at, the greater will be the built-in required yield to maturity.

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