CFA Practice Question

There are 266 practice questions for this study session.

CFA Practice Question

An analyst is evaluating the two bonds below:

Item | Bond A | Bond B
Coupon | 6.90% | 8.25%
Maturity | Oct 29, 2019 | Nov 4, 2019
Callable | No | No
Price | $102.17 | $102.39
Yield | 6.60% | 7.90%

Compared with Bond A, Bond B most likely will have:
A. less reinvestment risk and more interest rate risk.
B. less interest rate risk and more reinvestment risk.
C. more interest rate risk and more reinvestment risk.
Explanation: Since both securities have essentially the same maturity, if all else is the same, the bond with the lower coupon rate will have a higher sensitivity to changes in interest rates. The higher the yield on the bond, the higher the reinvestment risk, because the investor must be able to reinvest at the same yield.

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