Problem: Consider again the two bonds in Question. If the investment goal is to leave the assets untouched until maturity, such as for a child's education or for one's retirement, which of the two bonds has more interest rate risk? What is the source of this risk? ( LG 19-1)
Question: Consider two bonds, a 10-year premium bond with a coupon rate higher than its required rate of return and a zero coupon bond that pays only a lump sum payment after 10 years with no interest over its life. Which do you think would have more interest rate risk-that is, which bond's price would change by a larger amount for given changes in interest rates? Explain your answer.