Question

Duration times the reinvestment rate will give the approximate change in bond price for a 1%...

Duration times the reinvestment rate will give the approximate change in bond price for a 1% change in interest rates.
  • A. True
  • B. False

It is possible that a bond with a shorter maturity than another bond may actually have a longer duration and be more sensitive to interest rate changes.
  • A. True
  • B. False

One of the benefits of zero-coupon bonds is that they lock in a compound rate of return (or reinvestment rate) for the life of the bond, if held to maturity.
  • A. True
  • B. False
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Homework Answers

Answer #1

1. The given statement is TRUE because duration of a bond when multiplied by the reinvestment rate, will give the approximate change in the bond price for the one percent of change in the interest rate and it is used to reflect the the risk exposure, particularly the investment risk exposure.

Given statement is TRUE.

2. The given statement is FALSE because a shorter maturity Bond will not be having a higher duration, however it may be more sensitive to the interest rate changes.

Given statement will be FALSE.

3. Given statement about zero coupon bonds are TRUE, because it would be helpful in locking the compound rate of return for the life of the bond to the maturity and it will not be paying any coupon payments.

Given statement is completely TRUE

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