Question

Problem 2 Part 1 Other things equal, which of the following bonds has the highest interest rate risk? (Hint: you do not need to do any calculation, just do pair-wise comparisons to determine which one is more sensitive to interest rate changes.) A. A 10-year, 10% coupon bond issued by the US Department of the Treasury. B. A 10-year, 20% coupon bond issued by the US Department of the Treasury. CHA 10-year, 20% coupon bond issued by Microsoft. D. A 15-year, 10% coupon bond issued by Santander. E. A 15-year zero-coupon bond issued by the Massachusetts State Government. Part 2 Which of the following statements are correct? In a strong-form efficient market, no one is able to earn a positive return In a weak-form efficient market, all historical information should have been incorporated into stock prices The disposition effect describes the phenomenon that investors are unwilling to sell assets that have increased in value Overconfidence can explain the fact that investors tend to trade more frequently than they In an efficient market, some investors can still eam higher returns by taking more risk fil Technical analysis does not generate consistent profits in a semi-strong form efficient

Answer 1

Answer to Part 1 - To ascertain as to which bonds can be riskier we can adopt following two basis to -

a. Bonds prices are inversely related to interest rate i.e. higher the interest rate value of the bonds price will be lesser.

b. Corporate bonds are more riskier than Government bonds. As government can pay the liability by raising taxes however Corporate's will have to depend on their earning only.

Hence, C is having the highest interest rate risks.

Answer to Part 2 - is b.