For bonds that have the same maturity date and same yield to maturity, the reinvestment risk for an investor holding the bonds to maturity is greatest for the bonds that are selling at: A. par value B. A premium to par value C. A discount to par value as a result of the bonds being issued as zero-coupon bonds D. A discount to par value as a result of market yields increasing after the bond was issued.
B. The higher the coupon, the more to reinvest.
my answer is B. you pay a premium for high coupon, and high coupon means high reinvestment risk
Correct answers, And I somewhat understand where you’re coming from. But whether you’re selling at a premium or a discount coupon is still the same, so wouldn’t a bond selling at a discount mean that a bigger portion of your investment is the coupon and therefore you have larger reinvestment risk?
D, is the answer, rates are decreasing and coupon will be reinvested at lower rates…can be refinanced as well
Why would you pay extra for a coupon? Isn’t the relation to that somewhat mixed? If you get a high coupon you get more investment risk, but less interest rate risk. How do we know we would pay a premium for the coupon?
Financedude The relationship goes Premium means Coupon > YTM. The main reason it’s a premium is that the coupon is higher than market rates so yes, you are in fact paying more for a coupon.
is it not that the lower the coupon the higher the reinvestment risk?
The lower the coupon, the higher the interest rate risk (i.e. Duration), zero’s have the highest interest rate risk. The higher the coupon, the highest the reinvestment risk.
yeah you are right meazza, how is malawi?
What is malawi?