clearlycanadian

Which of the following bonds, all else equal, would be the most sensitive to interest rate changes?

A) 5% coupon, 25 years to maturity.

B) 10% coupon, 5 years to maturity.

C) 10% coupon, 25 years to maturity.

---

Long-term, low coupon bonds are more sensitive to rate changes.

clearlycanadian

All else equal, the lower the bond’s yield to maturity, the:

A) shorter the duration and the lower the interest rate risk.

B) shorter the duration and the higher the interest rate risk.

C) longer the duration and the higher the interest rate risk.

---

A lower yield to maturity would result in a longer duration and higher interest rate risk.

clearlycanadian

Tom Wilkens is a portfolio manager and has a retiree as a client. The client would like to invest in bonds with low interest rate risk. Which bond should Tom choose for his client? The bond with a:

A) 10 year maturity and a yield to maturity of 8%.

B) 20 year maturity and a yield to maturity of 5%.

C) 10 year maturity and a yield to maturity of 5%.

---

The shorter the bond’s maturity and the higher the yield to maturity, the shorter the duration and the lower the interest rate risk.

clearlycanadian

Which of the following bond features would result in lower interest rate risk? A:

A) lower coupon rate.

B) higher yield to maturity.

C) longer maturity.

---

A higher yield to maturity would result in a shorter duration and lower interest rate risk. A longer maturity and lower coupon rate would result in longer durations and higher interest rate risk.

clearlycanadian

What will happen to interest rate risk for an option-free bond if market yields decrease?

A) Interest rate risk will increase.

B) Interest rate risk will decrease.

C) Even if the term structure is flat, interest rate risk could go up or down based on the level of the term structure at the time market yields decrease.

---

If market yields decrease, interest risk will increase since the duration or the sensitivity of the bond to interest rate fluctuation will increase.