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LOS c, (Part 2): Discuss the factors that affect reinvestment risk.ffice ffice" />
Q1. All else being equal, which of the following bond characteristics will lead to lower levels of coupon reinvestment risk?
A) Longer maturities and higher coupon levels.
B) Shorter maturities and higher coupon levels.
C) Shorter maturities and lower coupon levels.
Correct answer is C)
Other things being equal, the amount of reinvestment risk embedded in a bond will decrease with lower coupons because the there will be a lesser dollar amount to reinvest and with shorter maturities because the reinvestment period is shorter.
Q2. All else being equal, which of the following bond characteristics will lead to higher levels of coupon reinvestment risk?
A) Longer maturities and lower coupon levels.
B) Longer maturities and higher coupon levels.
C) Shorter maturities and higher coupon levels.
Correct answer is B)
Other things being equal, the amount of reinvestment risk embedded in a bond will increase with higher coupons because there is a greater dollar amount to reinvest, and with longer maturities because the reinvestment period is longer.
Q3. If the coupon payments are reinvested at the coupon rate during the life of the issue, then the:
A) yield to maturity is less than the realized yield.
B) yield to maturity is greater than the realized yield.
C) yield to maturity cannot be determined from the information given.
Correct answer is C)
For the calculated YTM to hold true all reinvestments must occur at that YTM, otherwise a new YTM will occur and we will not be able to calculate it.
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发表于 2009-3-4 09:22
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