CFA Practice Question

CFA Practice Question

Bonds A, B and C have the same maturity and face value of $100. They have:

Coupons of 5.4%, 5.5% and 5.7%.
Prices of $105, $106, and $108.
Yields of 5.44%, 5.45% and 5.43%.

Which is the bond with the highest re-investment risk?
A. A
B. B
C. C
Explanation: The bond with the highest yield has the greatest reinvestment risk.

User Contributed Comments 4

User Comment
Luizillo i think the bond with the highest coupon has the greatest reinvestment risk.
ninad123 I think Luizillo i scorrect, Cash is in Coupons, High Coupons==> High Cash in Hand==> High Reinvestment risk

Any one thinking otherwise?
mary11 Very tricky question. The reinvestment risk is the risk that proceeds available for reinvestment must be reinvested at a lower interest rate than the instrument that generated the proceeds. The higher the required yield, the more reinvestment risk the bond has. Higher coupon rate cause highs higher required yield, other things being equal. It's the yield, not the coupon rate, that causes the reinvestment rate. Therefore the answer is correct.
emma51 good explantion mary11: better than AN's.
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