Question

Explain whether the following bonds have lower or higher price risk; Short-term bonds and long-term bonds Low coupon and high coupon bonds

Answer 1

A.

Longer term bonds have higher price risk than short term bonds. Because there's greater probability that interest rates will rise in a longer time period. (Which negatively affects bond market prices). This's also because longer term bonds have longer duration (sensitivity of bonds prices to interest rates change).

B.

Higher coupon bonds leads to higher price & vice versa. When new bonds are issued with higher interest rates, they are automatically more valuable to investors, because they pay more interest per year, compared to pre-existing bonds.