Asked by Meagan Bowman on Apr 27, 2024
Verified
Which statement regarding bonds is true?
A) 10-year, zero coupon bonds have higher reinvestment rate risk than 10-year, 10% coupon bonds.
B) A 10-year, 10% coupon bond has less reinvestment rate risk than a 10-year, 5% coupon bond (assuming all else is equal) .
C) The total return on a bond during a given year is the sum of the coupon interest payments received during the year and the change in the value of the bond from the beginning to the end of the year.
D) The price of a 20-year, 10% bond is less sensitive to changes in interest rates than the price of a 5-year, 10% bond.
Reinvestment Rate Risk
The risk that the yield from reinvesting cash flows will be lower than the initial investment's yield, typical in fixed-income securities.
Zero Coupon Bonds
Bonds that do not pay periodic interest payments and are instead sold at a discount from their face value and redeemed at maturity for the full face value.
Coupon Payments
Periodic interest payments made to bondholders, usually on an annual or semi-annual basis, as compensation for investing in the bond.
- Master the concept of how interest rate dynamics affect bond prices and the yields they offer.
- Explain the principles of reinvestment risk and interest rate risk in the context of bond investments.
Verified Answer
Learning Objectives
- Master the concept of how interest rate dynamics affect bond prices and the yields they offer.
- Explain the principles of reinvestment risk and interest rate risk in the context of bond investments.
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