Asked by Hudson Nyaki on Jul 05, 2024
Verified
Which one of the following bonds has the greatest interest rate risk?
A) 10-year, zero-coupon
B) 10-year, 8% coupon
C) 20-year, zero-coupon
D) 20-year, 4% coupon
E) 20-year, 8% coupon
Interest Rate Risk
The risk of investment value changes due to variations in the level of interest rates.
Zero-Coupon
A bond that does not pay periodic interest and is issued at a substantial discount from its face value.
Coupon
The interest rate stated on a bond when issued, which represents the annual interest payment made to the bondholder.
- Understand the concept of interest rate risk and identify which bonds are more susceptible to it.
Verified Answer
JG
Jeron GallimoreJul 07, 2024
Final Answer :
C
Explanation :
Zero-coupon bonds have higher interest rate risk compared to coupon bonds of the same maturity because they do not pay interest until maturity. Among the options, the 20-year, zero-coupon bond (C) has the longest duration, making it the most sensitive to changes in interest rates.
Learning Objectives
- Understand the concept of interest rate risk and identify which bonds are more susceptible to it.