Interest and reinvestment rate risk
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2. Which of the following bonds has the most interest rate risk and why? Which has the most reinvestment rate risk and why?
a) A 5-year bond with a 9% annual coupon
b) A 5-year bond with a zero coupon
c) A 10-year bond with a 9% coupon
d) A 10-year bond with a zero coupon.
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Interest rate risk: Sensitivity of bond's market value to interest rate changes.
If the interest rates go up, the price of the bond will decrease. The higher the decrease in price ...
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