Which has more interest rate risk a 2-year or 10 year bond, all else equal, why?...
Which has more interest rate risk a 2-year or 10 year bond, all else equal, why?
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the 2 year bond will have more interest rate because the latter cash flows are subjected to increased discounting associated with a given interest rate. |
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the 10 year bond will have more interest rate because the cash flows in the future are subjected to increased discounting associated with a given interest rate. |
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the 10 year bond will have more interest rate because the cash flows in the future are larger. |
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the 2 year bond will have more interest rate because the cash flows in the future are smaller. |
Homework Answers
The 10 year bond will have more interest rate because the cash flows in the future are larger.
There is a higher probability that interest rates will fluctuate within a longer time span than in a shorter time span. HIgher duration is higher interest rate risk. Hence options 1 and 4. Option 2 is incorrect since discounting greater number of cash flows does not make the difference. It is the rate of discounting that matters.
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