(b) Investor A holds a 15-year bond, while investor B has an 7-year bond. If interest...
(b) Investor A holds a 15-year bond, while investor B has an 7-year bond. If interest rate increases by 1 percent, which investor will have the higher interest rate risk? Explain.
(c) Investor A holds a 10-year bond paying 8 percent a year, while investor B also has a 10-year bond that pays a 6 percent coupon. Which investor will have the higher interest rate risk? Explain.
Homework Answers
1.
15 year bond has higher interest rate risk because the higher the
maturity the higher is the interest rate risk because more coupons
are to be received and price is the present value of all
coupons
2.
6 percent coupon bond has higher interest rate risk because the
lower the coupon rate the higher is the interest rate
risk
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