Question 5: Which of the following contracts has the most price risk? The most reinvestment risk?...

Question 5: Which of the following contracts has the most price risk? The most reinvestment risk?

7-year bond with a 5% coupon

1-year bond with a 12% coupon

3-year bond with a 5% coupon

15-year zero coupon bond

15-year bond with a 10% coupon

Solutions

Expert Solution

Higher reinvestment risk with > 15-year bond with a 10% coupon

The highest reinvestment risk will be with the highest coupon paying bonds with longer term to maturity and so on.

The ranking goes below for higher to lower reinvestment risk:

Rank	Particulars
1	15-year bond with a 10% coupon
2	7-year bond with a 5% coupon
3	3-year bond with a 5% coupon
4	1-year bond with a 12% coupon
5	15-year zero coupon bond

jeff jeffy answered 1 year ago

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