Assuming that all bonds have a face value of $1,000 and a yield to maturity of...

Assuming that all bonds have a face value of $1,000 and a yield to maturity of 8%, which of the following bonds will have the highest degree of price interest rate risk?

A bond with 8% coupon rate that matures in 15 years.

A bond with 6% coupon rate that matures in 15 years.

A bond with 8% coupon rate that matures in 30 years.

A bond with 6% coupon rate that matures in 30 years.

Solutions

Expert Solution

The bond with longer term to maturity will have larger interest rate risk for prices a concept called Convexity. In the above example, the bonds that mature in 30 years have greater convexity. In general, the higher the coupon lower the convexity.

Answer is A bond with 6% coupon rate that matures in 30 years.

jeff jeffy answered 2 years ago

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