Briefly explain the difference between price and reinvestment risk. a. Rank the following bonds from the...
Briefly explain the difference between price and reinvestment risk.
a. Rank the following bonds from the highest price risk to the lowest price risk.
b. Rank the same bonds from the highest reinvestment risk to te lowest reinvestment risk.
1. A one-year bond with a 8% annual coupon
2. A 7-year bond with a 8% annual coupon
3. A 7-year bond with a zero coupon
4. A 12-year bond with a 8% annual coupon
5. A 12-year bond with a zero coupon.
Homework Answers
Price risk is the risk of fall in bond price or capital loss due
to change in interest rates
Reinvestment risk is the risk of reinvesting the coupons received
at a lower rate than expected at the time of buying the bond
Price risk is highest for lowest coupon and highest
maturity
Reinvestment risk is highest for highest coupon and shortest
maturity
Price risk:
A 12-year bond with a zero coupon.
A 12-year bond with a 8% annual coupon
A 7-year bond with a zero coupon
A 7-year bond with a 8% annual coupon
A one-year bond with a 8% annual coupon
Reinvestment risk:
A one-year bond with a 8% annual coupon
A 7-year bond with a 8% annual coupon
A 7-year bond with a zero coupon
A 12-year bond with a 8% annual coupon
A 12-year bond with a zero coupon.
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