Question

1. A Treasury bond's price is comprised of which components?

I. A lump-sum cash flow

II. An annuity due

III. An ordinary annuity

IV. A perpetuity

		II and III only
		I and IV only wrong
		I only    wrong
		I and II only

2. Which bond would have the greatest interest rate risk?

		10-year, 5% coupon bond
		5 year, Zero-coupon bond wrong
		5 year, 5% coupon bond
		10 year, Zero-coupon bond

Answer 1

1. The treasury bond's price comprises of a lump sum cash flow and a annuity due (where the interest is paid at the beginning of each period) So option I and II only would be the correct answer.

2. 10 year bond with 5% coupon will have the highest interest rate risk because comparitively it gives a lower rate for a longer period. So option I is the correct one.