Fixed Income - Fixed Income Section 2
6. A horizon yield is the internal rate of return between the total return and the:
- Option : A
- Explanation : A horizon yield is the internal rate of return between the total return (i.e. the sum of reinvested coupon payments and sale price) and the purchase price of the bond.
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7. Bond A has a maturity of 8 years. Bond B has a maturity of 4 years. All else equal:
- Option : A
- Explanation : The longer the maturity, the higher the reinvestment risk.
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8. Bond A has a coupon rate of 10%. Bond B has a coupon rate of 5%. All else equal:
- Option : A
- Explanation : The higher the coupon rate, the higher the reinvestment risk.
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- Option : C
- Explanation : A bond selling at a discount has a lower coupon rate. All else being equal, bonds with lower coupon rates have lower reinvestment risk. The reason is that the lower the coupon rate, the less dependent the bond's total dollar return will be on the reinvestment of the coupon payments in order to produce the yield to maturity at the time of purchase.
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- Option : B
- Explanation : If the investment horizon is short, market price risk will dominate the reinvestment risk.
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