Which of the following statement is most likely to be true

Which of the following statement is most likely to be true?Select one:

a. The prospect of future in ation very strongly in ences the shape of the term structure

b. If yield to maturity is higher than coupon rate, it is called a “discount bond”

c. If the borrower is certain to make all the payments, there is still risk in owning the bond

d. All of the above

The correct answer and explanation is:

The correct answer is d. All of the above.

Here’s a breakdown of each statement:

1. The prospect of future inflation very strongly influences the shape of the term structure:
   This statement is true because inflation expectations play a significant role in determining interest rates across different maturities. The term structure, or yield curve, represents the relationship between bond yields and their maturities. When inflation is expected to rise, long-term interest rates tend to increase, causing the yield curve to slope upward. Conversely, if inflation is expected to fall, the yield curve may flatten or even invert.
2. If yield to maturity is higher than coupon rate, it is called a “discount bond”:
   This statement is also correct. A bond is considered a discount bond when its yield to maturity (YTM) exceeds its coupon rate. This happens because the bond is priced below its face value. Investors buying the bond at a discount will receive the coupon payments (which are fixed) and the face value (which is higher than the purchase price) at maturity. This makes the yield to maturity higher than the coupon rate.
3. If the borrower is certain to make all the payments, there is still risk in owning the bond:
   Even if a borrower is certain to make all scheduled payments, there are still risks associated with owning a bond. The main risks include interest rate risk (where the market value of the bond fluctuates with changes in interest rates) and inflation risk (where the real value of the bond’s payments may be eroded by inflation). Additionally, in cases of callable bonds, there is the risk that the issuer might redeem the bond early, which could impact the investor’s return.

Since all three statements are true, the correct choice is d. All of the above.