Price Risk
An investor has a one-year time horizon (H=1)
He can invest in three different zero coupon bonds:
1) 1-year-zero-coupon bond
2) 5-year-zero-coupon bond
3) 10-year zero-coupon bond
The current level of the interest rate is equal to 5% per year. During the first year, the interest rate rises from 5 to 10% per year (stays constant afterwards)
What is the annual realized return of the three bonds?
Present Value Coefficients
Year 1 2 3 4 5 6 7 8 9 10
5% 0,95 0,91 0,86 0,82 0,78 0,74 0,71 0,68 0,64 0,61
10% 0,91 0,83 0,75 0,68 0,62 0,56 0,51 0,47 0,42 0,38