Question

Which bond has the highest interest risk? Group of answer choices 2-year zero coupon bond 5-year...

Which bond has the highest interest risk?

Group of answer choices

2-year zero coupon bond

5-year zero coupon bond

10-year bond with 5% coupon rate

20-year bond with 5% coupon rate

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Answer #1

Answer :20-year bond with 5% coupon rate

Explanation:

Maturity affect interest rate risk. The longer the bond’s maturity, the greater the risk that the bond’s value could be impacted by changing interest rates prior to maturity, which may have a negative effect on the price of the bond. Therefore, bonds with longer maturities generally have higher interest rate risk than similar bonds with shorter maturities.

Longer maturity = higher interest rate risk

Shorter maturity = lower interest rate risk

To compensate this interest rate risk, long-term bonds generally offer higher coupon rates than short-term bonds of the same credit quality.


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