Which of the following statements is correct?
A)Long-term bonds have more reinvestment rate risk than short-term bonds.
B)Long-term bonds have more interest rate risk than short-term bonds.
C)Short-term bonds with high coupons have high interest rate risk.
D)Zero-coupon bonds do not have interest rate risk.

Question

Quizplus · Accepted Answer

Long-term bonds have more interest rate risk than short-term bonds because their cash flows are further into the future, which makes them more sensitive to changes in interest rates. Reinvestment rate risk is a concern for bonds with coupon payments that will be reinvested at a lower rate than the current yield, but this risk is not limited to long-term bonds. Short-term bonds with high coupons also have higher interest rate risk because they will be replaced with new bonds offering lower coupons if interest rates decline. Zero-coupon bonds have the highest interest rate risk of any bond because their entire return is dependent on changes in interest rates.

Which of the Following Statements Is Correct