Interest rate risk were replaced by reinvestment rate risk

Assignment Help Financial Management

Reference no: EM131830174

Which of the following statements is correct?

a. Bonds C and Z both have a $ 1,000 par value and 10 years to maturity. They have the same default risk, and they both have an effective annual rate (EAR) = 8%. If Bond C has a 15 percent annual coupon and Bond Z a zero coupon (paying just $1,000 at maturity), then Bond Z will be exposed to more interest rate risk, which is defined as the percentage loss of value in response to a given increase in the going interest rate.

b. If the words "interest rate risk" were replaced by the words "reinvestment rate risk" in Statement a, then the statement would be true.

c. The interest rate paid by the state of Florida on its debt would be lower, other things held constant, if interest on the debt were not exempt from federal income taxes.

d. Given the conditions in Statement a, we can be sure that Bond Z would have the higher price.

e. Statements a, b, c, and d are all false.

Reference no: EM131830174

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