Question

You are looking for at a 5 year 10% coupon bond with a BBB rating and a 30 year 4% coupon bond with a AAA rating. Which bond has the most default risk and why? Which bond has the most interest rate price risk and why?

Answer 1

BBB rated Bond will be having most default risk because it is a lower rated Bond and it will be not having the investment grading and it will be exposed to to default it on its payment related to interest and principal because it is a lower rated Bond having a lower creditworthiness.

AAA rated bonds will be having most interest rate price risk because it will have a very low coupon rate associated with it and any change in the interest rate on the higher side will make it less attractive because it is offering with a very low coupon rate and hence these bonds will be having the most interest rate price risk as they are having a lower coupon rate.