Question

Analyse the risk of the following securities, and rank them from lowest risk to
highest risk. Justify your ranking.
(i) Government treasury 20-year zero coupon bond
(ii) 30-year Treasury Inflation Protected Security
(iii) 20-year corporate convertible bond

Answer 1

The risk can be define as uncertainty of return from any investment , which may create due to default , inflation , non-payment of return etc.

The security ranked from the lowest risk to the highest risk are :

30-year Treasury Inflation Protected Security : as no default risk , and protected from risk of inflation

Government treasury 20-year zero coupon bond : as no default risk but inflation risk may reduce net yield

20-year corporate convertible bond : as default risk in case of non-performance of company or in bad economy condition