Which one of the following bond expose an investor to the least amount of reinvestment risk? a. A mortgage backed security with schedule principle and interest payments b. An 8%, 10 yrs Treasury bond with semiannual payments c. a non amortising bond with monthly coupon payments d. a 15 yrs Treasury strip My answer to the question is A. But the correct answer is D. I still couldnt understand why Treasury Strip has the least reinvestment risk? Thanks
A is definitely not right as an MBS will have its own tranches. Maybe its D as a T-strip would be a 0 coupon bond?
a treasury STRIP is stripped of its coupons… making it an effective 0CB…
acwu is right, the answer is D. A stripped treasury bond is a 0 coupon instrument, therefore pays no interest and doesn’t require any progressive reinvestment until maturity when the yeild is taken from the degree of the discount offered when the strip is purchased. All the other instruments pay interest, therefore there is a risk that these payments cannot be reinvested in instruments bearing the same yeild.
Got it ! Thanks