All other things being equal the interest rate risk of a fixed coupon bond is:
A) greater, the higher the coupon and the longer the term
B) greater, the lower the coupon and the longer the term
C) lower, the lower the coupon and the shorter the term
D) lower, the higher the coupon and the longer the term

Question

Quizplus · Accepted Answer

The interest rate risk of a fixed coupon bond is greater when the coupon is lower and the term is longer. When interest rates rise, the value of the bond decreases more for lower coupon bonds because their fixed coupon payments are less attractive compared to newer bonds that have higher coupon rates. Additionally, longer-term bonds have a higher sensitivity to interest rate changes because the cash flow from their fixed coupons is received farther in the future and is therefore subject to more uncertainty.

All Other Things Being Equal the Interest Rate Risk of a Fixed