Rank the following option-free bonds based on their reinvestment risk, from the highest to the lowest:...

Rank the following option-free bonds based on their reinvestment risk, from the highest to the lowest:

Bond U: a 20-year zero-coupon bond

Bond V: a 20-year 8% coupon bond

Bond W: a 2-year 8% coupon bond.

Solutions

Expert Solution

Zero-coupon bonds are redeemed at maturity so there is a lower reinvestment risk whereas bonds with having a lower time duration are subject to have a higher reinvestment risk.

Bonds being ranked from highest to lowest on basis of their reinvestment risk

A. Bond W- A 2 year 8% coupon Bond

B. Bond V= 20 year 8% coupon Bond

C. Bond U= 20 year zero coupon Bond.

jeff jeffy answered 1 year ago

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