fixed income

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Joined: Mon Feb 04, 2013 2:20 pm

fixed income

Postby rajesh.747.bits » Mon Feb 04, 2013 2:24 pm

Difference between reinvestment risk and price risk in terms of zero coupon bond and coupon bond?

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fixed income

Postby shreyas » Tue Feb 05, 2013 12:14 pm

Reinvestment risk is the risk that happens when you invest the coupon or principal amount at a lower rate than your previous investment

Price risk happens when you invest in a bond, and the interest rates or the yield on the bond rises due to which bond loses its value.

Reinvestment is lower in a zero coupon bond and higher in a coupon bond.

On the other hand a zero coupon bond has more price risk than a coupon bond, since it has no cash flows over its life and thus gets affected by change in interest rates.

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