Question

In: Finance

Reinvestment risk is the greatest for which one of the following bonds 8.00% coupon rate and...

Reinvestment risk is the greatest for which one of the following bonds

8.00% coupon rate and 10 years to maturity

4.00% coupon rate and 20 years to maturity

4.00% coupon rate and 10 years to maturity

8.00% coupon rate and 20 years to maturity

Solutions

Expert Solution

Reinvestment risk is the risk that the investor will not be able to invest the cash flow earned at the same return which he earns on the investment i.e the returns earned on the cash flows invested will be less than the return on the original investment.

The longer maturity investments have less reinvestment risk as the principle amount  will not be available soon and they will not be re invested soon,

and the lower coupon rate investments has lower reinvestment risk.

The reinvestment risk will be maximum for larger coupon rates investments as the investor may not get the same rate of return on the cash flows and short maturity bonds as there will be need to reinvest them soon and there will be risk that the interest rate will fall and the investment will provide lower return.

Hence,

Reinvestment risk is the greatest for 8.00% coupon rate and 10 years to maturity.

Hope it helps!


Related Solutions

Reinvestment risk is the greatest for which one of the following bonds 8.00% coupon rate and...
Reinvestment risk is the greatest for which one of the following bonds 8.00% coupon rate and 20 years to maturity 4.00% coupon rate and 20 years to maturity 4.00% coupon rate and 10 years to maturity 8.00% coupon rate and 10 years to maturity I was thinking this was 4 and 20 but am not sure! Thank you!
Which one of the following bonds has the greatest interest rate risk? a) 20-y & 4%...
Which one of the following bonds has the greatest interest rate risk? a) 20-y & 4% coupon b) 20-y & 3% coupon c) 20-y & 2% coupon d) 10-y & 2% coupon
Which one of the following bonds has the greatest interest rate risk? A. 3-year; 4 percent...
Which one of the following bonds has the greatest interest rate risk? A. 3-year; 4 percent coupon B. 3-year; 6 percent coupon C. 5-year; 6 percent coupon D. 7-year; 6 percent coupon E. 7-year; 4 percent coupon You are quoted an interest rate of 7% per year with monthly compounding on your car loan. Which of the following is a FALSE statement? A. The effective annual interest rate (EAR) is greater than 7%. B. The equivalent APR with daily compounding...
What is reinvestment rate risk? Which has morereinvestment rate risk: a 1-year bond or a...
What is reinvestment rate risk? Which has more reinvestment rate risk: a 1-year bond or a 10-year bond.please explain
Which ONE of the following statements is wholly CORRECT: a. Zero-coupon bonds have fixed coupon rate....
Which ONE of the following statements is wholly CORRECT: a. Zero-coupon bonds have fixed coupon rate. b. Zero coupon bonds are sold at a price above par value. c. None of the answers are correct. d. Zero-coupon bonds are sold at a price below par value. e. Zero-coupon bonds are valued using simple interest.
which of the following risk-free zero-coupon bonds could be bought for the lowest price? A. one...
which of the following risk-free zero-coupon bonds could be bought for the lowest price? A. one with a face value of $1,000 a ytm of 6.2% and 18 years to maturity B. one with a face value of $1,000 a ytm of 7.8% and 15 years to maturity C. with a face value of $1,000 a ytm of 6.8% and 18 years to maturity D.one with a face value of $1,000 a ytm of 5.9% and 20 years to maturity
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.
Describe the concepts of interest rate risk and reinvestment risk. Given these concepts of risk, what...
Describe the concepts of interest rate risk and reinvestment risk. Given these concepts of risk, what does this say about risk-free bonds?
AMZN HD WMT Risk-Free Rate 2.40% 2.40% 2.40% Market Risk Premium 8.00% 8.00% 8.00% Beta 1.45...
AMZN HD WMT Risk-Free Rate 2.40% 2.40% 2.40% Market Risk Premium 8.00% 8.00% 8.00% Beta 1.45 1.15 0.40 Long-term Bond Yield 3.70% 3.85% 3.55% Average Tax Rate 38% 37% 32% MV Debt Capital $17,495 $27,141 $52,829 MV Equity Capital $355,438 $164,784 $214,341 WACC compute the WACC for each of the three companies (Amazon, Walmart and Home Depot). You will need to compute the cost of debt capital and the cost of equity capital from the information provided. Determine the weighted...
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
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT