Coupon reinvestment risk increases with a. Lower coupon/shorter reinvestment per
ID: 2753106 • Letter: C
Question
Coupon reinvestment risk increases with a. Lower coupon/shorter reinvestment period b. Higher coupon/ longer reinvestment period c. Coupon and reinvestment period have no impact
Bond capital gain are measured from a. Purchase price b. Carrying value c. Coupon rate d. Sale price
MacAulay duration measures a. Estimate s linear change in prices for a change in yield to maturity b. Estimates linear change in price for a change in bench mark yield c. Weighted average of time to receipt of coupon interest payment
Explanation / Answer
I.
Answer is b. Higher coupon/longer reinvestment period.
In case of high coupon rate, the reinvestment have to be made at high rate to match the YTM. Similarly in case of longer period, reinvestment have to be made for long period to match the YTM. Hence, this increases the reinvestmetn risk.
II.
Answer is a. Purchase price and d. Sale price.
Capital gain is calculated as the difference of sale price and purchase price.
III.
MacAulay duration measures estimate linear change in prices for a change in yield to maturity.