   Chapter 7, Problem 16Q Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250

Solutions

Chapter
Section Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250
Textbook Problem

Which of the following bonds has the most price risk? Explain your answer. (Hint: Refer to Table 7.2.) a. 7-year bonds with a 5% coupon. b. 1-year bonds with a 12% coupon. c. 3-year bonds with a 5% coupon. d. 15-year zero coupon bonds. e. 15-year bonds with a 10% coupon.

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%. The maturity period of this bond is shorter in comparison to the other bonds however, the rate is higher...

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