Question

4. If an investor has a long term investment horizon relative to the time to maturity of the bond, then which of the following interest rate risks is most important to the investor?

A. Market price risk

B. Coupon re-investment risk

C. Effective duration

Answer 1

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Answer:

Option A is incorrect as market price risk is a cause for concern for investors with a short-term investment horizon. By holding the bond till maturity the holder will receive the par value of the bond

Option B is correct as coupon reinvestment risk is the larger problem for long term investors, as there is more time to maturiy for that reinvested principal to compound, and doing so at a lower rate would be more detrimental.

Option C is incorrect as effective duration is not a cause for concern as it is used to calculate the duration for bonds with embedded options

Hence option B