Which of the following statements best identifies and explains which bond is used as the expected return for a bond segment? | A) | A zero coupon bond, because of the maturity assumption. |
| B) | A zero coupon bond, because of the reinvestment rate assumption. |
| | C) | A coupon bond, because of the reinvestment rate assumption. |
| | D) | A coupon bond, because of the maturity assumption. |
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Answer and Explanation
The yield to maturity on a reference bond in a segment is used as the expected return. The drawback to this approach is that the yield to maturity assumes that intermediate cash flows are reinvested at the yield to maturity, which may be implausible if the yield to maturity is quite high. A zero coupon bond has no intermediate cash flows so it is not susceptible to the reinvestment rate assumption of the yield to maturity in a coupon bond. A zero coupon bonds yield to maturity would be preferable to that of a coupon bond.
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发表于 2008-9-12 14:49
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