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

Question

Business

Damien Hatfield

9 December, 20:10

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

+3

Answers (2)

Know the Answer?

Ezequiel · Answer 1

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.

Lorelei Stone · Answer 2

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.

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

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