Which of the following Treasury Bonds will have the largest amount of interest rate risk (price risk) and why?
A. A 7% coupon bond which matures in 12 years.
B. A 9% coupon bond which matures in 10 years.
C. A 12% coupon bond which matures in 7 years.
D. A 7% coupon bond which matures in 9 years.
E. A 10% coupon bond which matures in 10 years© BrainMass Inc. brainmass.com June 4, 2020, 12:11 am ad1c9bdddf
The response is e) - A 10% coupon bond which matures in 10 years. You would make the most money with this if the interest rates stayed the same and you planned on keeping it to maturity, however, this one also carries the more risk because of its length in time until maturity.
In about 200 words, this solution addresses the concept of risky bonds and discuses how the YTM of a bond is very influential on the amount of risk linked to a particular coupon bond.