Question

which of the following bonds has the highest price risk or interest rate risk? 1. a...

which of the following bonds has the highest price risk or interest rate risk?
1. a 10 year old 0% coupon bond
2. a 5 year old 0% coupon bond
3. a 10 year 5% coupon bond
4. a 5 year 5% coupon bond
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Homework Answers

Answer #1

A bond with a longer duration is more sensitive to interest rate or price risk.

Hence, Option 2 and Option 4 got ruled out.

Also, a zero-coupon bond is more sensitive to interest rate risk as all the payment is received during maturity. Any change in interest rate would impact the value of a zero-coupon bond to a great extent.

Hence, a 10-year-old 0% coupon bond has the highest price risk or interest risk.

Option 1 is correct.

Please let me know in case you have any queries and I will be happy to assist you.

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