5. Interest rate and reinvestment rate risk Frank Bernanke is retiring soon, so

Question

5. Interest rate and reinvestment rate risk Frank Bernanke is retiring soon, so he is very concerned about his investmetns providing him steady income every year. In particular, he is concerned that a decline in interest rates might lead to less annual income from his investments. What kind of risk is Frank most concerned about protecting against? >Reinvestment rate risk OK > Interest rate risk Which of the following bonds poses the biggest risk to Frank's investment goals? >20-year, 105 coupon bon that may be called in 10 years >30-year, 10% coupon bond >30-year, 0% coupon bond >20-year, 0% coupon bond > 20-year, 10% coupon bond

Explanation / Answer

Interest rate risk Which of the following bonds poses the biggest risk to Frank's investment goals?

Ans : 20-year, 105 coupon bon that may be called in 10 years. Post 10 Yrs, he is not sure of investmnet climate. Other investmnets are long term with No call feature & thus will assure him steady returns.

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