Which of the following bonds has the greatest interest rate risk? a. a 5 year, 10% coupon bond b. a 10 year, 10% coupon bond c. a 5 year, 5% coupon bond d. a 10 year, 5% coupon bond | Homework.Study.com (2024)
This is the risk that the bond's price will change as a result of changing interest rates. This risk can be measured using the modified duration formula. This formula provides the percentage change in the bond price for a one percent increase in interest rates.
Investors holding long term bonds are subject to a greater degree of interest rate risk than those holding shorter term bonds. This means that if interest rates change by 1%, long term bonds will see a greater change to their price—rising when rates fall and falling when rates rise.
A 10-year, $1,000 face value, zero-coupon bond has the greatest interest rate price risk. A bond's interest rate risk depends mainly on two factors: the period to maturity and coupon payments. All the bonds have the same period to maturity (10 years), however, they differ in terms of coupon payments.
Therefore, bonds with longer maturities generally have higher interest rate risk than similar bonds with shorter maturities. to compensate investors for this interest rate risk, long-term bonds generally offer higher coupon rates than short-term bonds of the same credit quality.
A Series I savings bond is a low-risk bond that adjusts for inflation, helping protect your investment. When inflation rises, the bond's interest rate is adjusted upward. But when inflation falls, the bond's payment falls as well.
Short-term bond funds most often invest in bonds that mature in one to three years. The limited amount of time until maturity means that interest rate risk is low compared to intermediate- and long-term bond funds.
5 Year Treasury Rate is at 4.53%, compared to 4.52% the previous market day and 3.90% last year. This is higher than the long term average of 3.75%. The 5 Year Treasury Rate is the yield received for investing in a US government issued treasury security that has a maturity of 5 years.
When overall interest rates fall (to 2%), the bond you already own (with 5% coupon rate) becomes more valuable to potential buyers, so its price will rise . 3. Generally, the longer the term of the bond, the ( lower / higher ) the chance the bond price may change due to changes in yield.
When overall interest rates rise (to 10%), the bond you already own (with 5% coupon rate) becomes? Less valuable to potential buyers, so its price will fall.
Risk factor: Since fixed-rate mortgages offer the same interest rate for the duration of the loan, they're less risky than the uncertainty that can come with adjustable-rate mortgages.
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