Question

(A,Default/B,Reinvestment/C,Price) risk is the risk of a decline in a bond's value due to an increase in interest rates. This risk is higher on bonds that have long maturities than on bonds that will mature in the near future. (A,Default/B,Reinvestment/C,Price) risk is the risk that a decline in interest rates will lead to a decline in income from a bond portfolio. This risk is obviously high on callable bonds. It is also high on short-term bonds because the shorter the bond's maturity, the fewer the years before the relatively high old-coupon bonds will be replaced with new low-coupon issues. Which type of risk is more relevant to an investor depends on the investor's (A,Investment Horizon/B,Default Period/C,Option Period), which is the period of time an investor plans to hold a particular investment. Longer maturity bonds have high (A,Reinvestment/B,Price/C,Exchange) risk but low (A,Reinvestment/B,Price/C,Exchange) risk, while higher coupon bonds have a higher level of (A,Reinvestment/B,Price/C,Exchange) risk and a lower level of (A,Reinvestment/B,Price/C,Exchange) risk. To account for the effects related to both a bond's maturity and coupon, many analysts focus on a measure called (A,Correlation/B,Duration/C,Signaling) , which is the weighted average of the time it takes to receive each of the bond's cash flows. Conceptual Question:
Which of the following bonds would have the largest duration?
A)10year-zero coupon bonds
B)10year-7% annual coupon bonds
C)10year-3% annual coupon bonds
D)5year-3% annual coupon bonds
E)3year-7% annual coupon bonds

Answer 1

Answer:

(C,Price) risk is the risk of a decline in a bond's value due to an increase in interest rates. This risk is higher on bonds that have long maturities than on bonds that will mature in the near future.

(B,Reinvestment) risk is the risk that a decline in interest rates will lead to a decline in income from a bond portfolio. This risk is obviously high on callable bonds. It is also high on short-term bonds because the shorter the bond's maturity, the fewer the years before the relatively high old-coupon bonds will be replaced with new low-coupon issues. Which type of risk is more relevant to an investor depends on the investor's

(A,Investment Horizon), which is the period of time an investor plans to hold a particular investment.

Longer maturity bonds have high (B,Price) risk but low (A,Reinvestment) risk, while higher coupon bonds have a higher level of (A,Reinvestment) risk and a lower level of (B,Price) risk. To account for the effects related to both a bond's maturity and coupon, many analysts focus on a measure called (B,Duration) , which is the weighted average of the time it takes to receive each of the bond's cash flows.

Conceptual Question:

Which of the following bonds would have the largest duration?

A)10year-zero coupon bonds

Explanation:

Price risk is the risk of a decline in the value of a security or an investment portfolio.

Reinvestment risk refers to the possibility that an investor will be unable to reinvest cash flows (e.g., coupon payments) at a rate comparable to their current rate of return. Zero-coupon bonds are the only fixed-income security to have no investment risk since they issue no coupon payments.

Investment horizon is the term used to describe the total length of time that an investor expects to hold a security or a portfolio

https://www.investopedia.com/terms/d/duration.asp