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Fundamentals of Financial Manageme...

9th Edition
Eugene F. Brigham + 1 other
ISBN: 9781305635937

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BuyFindarrow_forward

Fundamentals of Financial Manageme...

9th Edition
Eugene F. Brigham + 1 other
ISBN: 9781305635937
Textbook Problem
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Which of the following bonds has the most price risk? Explain your answer. (Hint: Refer to Table 7.2.)

  1. a. 7-year bonds with a 5% coupon.
  2. b. 1-year bonds with a 12% coupon.
  3. c. 3-year bonds with a 5% coupon.
  4. d. 15-year zero coupon bonds.
  5. e. 15-year bonds with a 10% coupon.
  6. f.

Summary Introduction

To determine: The bond with most price risk.

Price risk:

The price risk is the risk attached to a bond. The price risk means that the price of a bond can decrease due to the increase in the interest rate. This risk is also called as interest rate risk.

Explanation

e.

The bond which has a longer maturity period and higher coupon rate can be paid-off in a long time. This bond is a 15-year bond and the coupon rate is 10%, which is higher in all the given bonds. So, the price risk is highest for this bond.

a.

The bond is a 7-year bond and the coupon rate is 5%. This bond has a longer maturity period but shorter than other given bonds, so the price risk is less in comparison to the other bond.

b.

The bond is a 1-year bond and the coupon rate is 12%...

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