(A,Default/B,Reinvestment/C,Price) risk is the risk of a decline in a bond's value due to an increase in interest rates. This risk is higher on bonds that have long maturities than on bonds that will mature in the near future. (A,Default/B,Reinvestment/C,Price) risk is the risk that a decline in interest rates will lead to a decline in income from a bond portfolio. This risk is obviously high on callable bonds. It is also high on short-term bonds because the shorter the bond's maturity, the fewer the years before the relatively high old-coupon bonds will be replaced with new low-coupon issues. Which type of risk is more relevant to an investor depends on the investor's (A,Investment Horizon/B,Default Period/C,Option Period), which is the period of time an investor plans to hold a particular investment. Longer maturity bonds have high (A,Reinvestment/B,Price/C,Exchange) risk but low (A,Reinvestment/B,Price/C,Exchange) risk, while higher coupon bonds have a higher level of (A,Reinvestment/B,Price/C,Exchange) risk and a lower level of (A,Reinvestment/B,Price/C,Exchange) risk. To account for the effects related to both a bond's maturity and coupon, many analysts focus on a measure called (A,Correlation/B,Duration/C,Signaling) , which is the weighted average of the time it takes to receive each of the bond's cash flows. Conceptual Question: Which of the following bonds would have the largest duration? A)10year-zero coupon bonds B)10year-7% annual coupon bonds C)10year-3% annual coupon bonds D)5year-3% annual coupon bonds E)3year-7% annual coupon bonds
