Zeros have no reinvestment risk, but why do they have higher interest rate risk (according to some notes I put down)? What’s their duration?
I think duration should be equal to maturity, only at maturity you, as investor, get back the investment. Because zeros have no coupons, they vary more at interest rates swings.
Zeros have no reinvestment risk cuz there is nothing to reinvest. However, zeros have high duration because lower price bonds, have higher durations, and a zero will trader lower, compared to a similar bond with same YTM that has a coupon.
Low coupon = higher duration, so no coupon = high duration.
> because lower price bonds, have higher durations, yes, since P0 (current price) is in the denominator of the duration formula, a lower P0 will lead to a higher duration, thus higher interest rate risk. Is that right? I’m very slow today
High interest rate risk because everything is tied to the maturity of bond. Duration is maturity.
the real question should be the effect of convexity on high yield / low yield bonds. was in one of schweser’s practice questions i think