Question

Which of the following bonds has the MOST reinvestment risk?

a. 7-year bonds with a 7% coupon
b. 10-year bonds with a 8% coupon
c. 15-year zero coupon bonds
d. 2-year bonds with an 20% coupon

Answer 1

c. 15-year zero coupon bonds

Step-by-step explanation:
The bond with the MOST reinvestment risk is the 15-year zero coupon bonds (option c). Zero coupon bonds don't pay periodic coupon payments, so all the potential return is concentrated at maturity. This makes them highly sensitive to changes in interest rates and increases the reinvestment risk.