Question

Which of the following does not involve Price Risk? The frequency of coupons. The change in price when interest rates change. The current rate of return when coupons come due. The length of the bond. The size of the coupon.

Answer 1

Price risk is the risk of price of a security /bond going down , ie decreasing --to the investor.

1.DOES INVOLVE---The frequency of coupons --does influence the price of the bond --as investors looking for incomes at certain times of the year, may not opt for the investment , if the frequency does not suit them -- collective such decisions is bound to affect the price of that bond, in teh overall bond-market.

2.DOES INVOLVE---changes in market interest or yield affects the prices, ie. When the interest is high, price falls & when it decreases, the price increases--market interest is nothing but potential investors' expected rate of return.

3..DOES NOT INVOLVE----Current rate of return, is after the bonds are purchased or invested in--- this is an internal assessment done by the investor , about his investment--which he had already made --and this is not likely to risk /influence the price of the security.

4.DOES INVOLVE--The longer the duration,the greater the effect of price volatility-- due to the risk of market interest rate changes, over that lengthier period.

5.DOES INVOLVE---Price varies in direct proportion to the the amount of coupon payments, as investors , lay their first emphasis on that fixed income only.

So, ANSWER is 3--- Current rate of return when coupons come due.