Question

Which of the following statements are correct?
A. If discount rate > coupon rate, then present value of a bond > face value
B. An annuity in which the periodic payment begins on a fixed date and continues forever is called perpetuity
C. The issuer of bond pays interest at fixed interval at fixed rate of interest to investor is called coupon payment
D. A sinking fund is a fixed payment made by a borrower to a lender at a specific date every month to clear off the loan
E. The issues of bond repays the principle i.e. face value of the bond to the investor at a later date termed as maturity date
Choose the correct answer from the options given below:

• A. A. C.E only
• B. A.B.D only
• C. B. C.E only
• D. A.B. C only

Answer 1

The Correct Option is A

A. Incorrect. 
The present value of a bond is less than its face value, not more, if the discount rate (or needed yield) is higher than the coupon rate. This is because the bond's fixed payments—the coupons and the face value at maturity—have a lower present value due to a higher rate of discounting.

B. Correct. 
In fact, a perpetuity is an annuity that pays out on a regular basis starting on a specific day and going on indefinitely.

C. Correct. 
The coupon payment is the interest that a bond issuer makes to bondholders at predetermined intervals at a predetermined rate.

D. Incorrect. 
A sinking fund is not a monthly payment plan that borrowers make to lenders in order to pay off their loans. By making recurring payments to a trustee who retires a portion of the issue by buying the bonds on the open market, a sinking fund serves as a mechanism for paying back money borrowed through the issuance of bonds.

E. Correct. 
Bonds have a maturity date, which is the later date by which the bond's issuer repays the investor the principal, or face value, of the bond.

Therefore, option (C) is correct : B. C.E only