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Which of the following types of bonds is most likely to maintain a constant market value?
a.Zero-coupon.
b.Callable.
c.Floating-rate.
d.Convertible.
Answer:C
Choice "C" is correct. Floating-rate bonds would automatically adjust the return on a financial instrument to produce a constant market value for that instrument. No premium or discount would be required since market changes would be accounted for through the interest rate.
Choice "a" is incorrect. Zero-coupon bonds have, in effect, a fixed stated rate of return that would require assignment of a premium or discount to the underlying security to produce a market rate of interest if that market yield is different from the stated rate.
Choice "b" is incorrect. Callable bonds would fluctuate in value. In fact, one of the advantages to the issuer of callable bonds is the ability to call or, effectively, refinance the bonds if interest rates become favorable.
Choice "d" is incorrect. Convertible bonds would fluctuate in value. In fact, one of the advantages to the investor (and potentially the issuer) in relation to convertible bonds is the ability to convert or, effectively, swap the bonds for equity if market conditions become favorable (equity returns exceed fixed return on debt).