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Which of the following statements is CORRECT? a
Which of the following statements is CORRECT? a. All else equal, high-coupon bonds have less reinvestment risk than low-coupon bonds. b. All else equal, long-term bonds have less price risk than short-term bonds. C. All else equal, low-coupon bonds have less price risk than high-coupon bonds. d. All else equal, short-term bonds have less reinvestment risk than long-term bonds. e. All else equal, long term bonds have less reinvestment risk than short-term bonds. ????? 0 0 0 0 0 0 24. 15
Expert Solution
Answer is Option d)
All else equal, short term bonds have less reinvestment risk than long term bonds
Reasons for respective option is given below:
a)
Reinvestment risk increases for bonds with longer maturities and higher coupon payments, and decreases for bonds with shorter maturities and lower coupon rates. ... As the credit risk of a bond increases, any changes to that perceived credit risk tend to have an increased impact on a Bond's price.
b)
A longer-term bond carries greater risk that higher inflation could reduce the value of payments, as well as greater risk that higher overall interest rates could cause the bond's price to fall. Bonds with maturities of one to 10 years are sufficient for most long-term investors.
c)
Bondsoffering lower coupon rates generally will have higher interest rate risk than similar bonds that offer higher coupon rates.
d) & e)
Reinvestment risk increases for bonds with longer maturities and higher coupon payments, and decreases for bonds with shorter maturities and lower coupon rates
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