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You hold a 10-year, zero coupon, bond and a 10-year bond that has a 6% annual coupon. The same market rate, 6%, applies to both bonds. If the market rate rises from the current level, the zero coupon bond will experience the larger percentage decline.

True or False

Respuesta :

danishmujtabaqureshi

Answer

TRUE

Explanation

By definition a zero-coupon bond does not make any coupon payments and therefore is sold at a deep discount from the face value. If market rate rises, by definition, the zero-coupon bond would experience a larger percentage decline. The 6% coupon bond would also experience a decline but the coupon payments of the bond would be the reason why this bond would experience smaller percentage decline relatively to the zero coupon bond.

jepessoa

Answer:

true

Explanation:

In this case, the reinvestment risk favors the bond with the annual coupon, since the proceeds from the coupon can be invested at a higher interest rate. The farther away the proceeds from a bond, the more it will be affected by a change in the market interest rate, that is why it carries a higher interest risk.  

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