Which bond has the greatest associated interest rate risk? A five year zero coupon bond? Or a five year bond that pays coupons?

Answer 1

Hey there!

Great question.

In finance, bonds that have higher coupon rates, tend to be less price-sensitive to interest rate changes.

In my mind, I look at the coupon rate almost as a "buffer" against interest rate changes.

In this case, since both bonds have the same maturity, the bond paying the coupon will be less sensitive to changes in interest rates than the zero-coupon bond.

Hope this helps.

-Jose