Question

Which of the following fixed-income obligations carries the greatest interest rate risk? Group of answer choices...

Which of the following fixed-income obligations carries the greatest interest rate risk?

Group of answer choices

A 12 percent coupon bond maturing in 12 years.

A 7 percent coupon bond maturing in 12 years.

A 7 percent coupon bond maturing in 7 years.

A 10 percent coupon bond maturing in 10 years

A 9 percent coupon bond maturing in 10 years.

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Homework Answers

Answer #1

Greatest interest rate risk is the bond with the highest duration. Duration of the bond indicates its sensitivity to interest rate changes. Duration of a bond is directly proportional to time to maturity for a bond and inversely related to coupon rate of the bond. So, higher the coupon rate or lower the number of years to maturity, lower would be the duration of the bond.

In the above question, highest maturity period is 12 years, lowest coupon rate is 7%. Bond with the combination of this would be our answer - one with the greatest interest rate risk. A 7 percent coupon bond maturing in 12 years.

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