   Chapter 7, Problem 17Q ### Fundamentals of Financial Manageme...

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

#### Solutions

Chapter
Section ### Fundamentals of Financial Manageme...

9th Edition
Eugene F. Brigham + 1 other
ISBN: 9781305635937
Textbook Problem
30 views

# Which of the bonds has the most reinvestment 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. f. g.

Summary Introduction

To determine: The bond having most reinvestment risk.

Reinvestment risk:

The reinvestment risk is therisk, which means that the principal and interest of the bond will be reinvested at a lower rate than the original investment. The decreasing interest rate causes lesser income from the portfolio of bonds.

Explanation

b.

The bond, which has a shorter maturity period has the most reinvestment risk. If the bond is having a short-term maturity, there will be fewer years. The old coupon bonds with higher interest rates will be replaced by new coupon bonds with lower interest rates. This bond is a 1-year bond and the coupon rate is 12%. It has the shortest maturity period in all the given bonds. So, the reinvestment 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, so the reinvestment risk is less in comparison to the other bond...

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