I guess it has inflation risk and interest rate risk. But when I look in my book I’m not sure about C or D. I mean if the investor is non-us it should have currency risk right? And I guess there is some volatility every day in the market so I don’t get this one.
Can someone explain please?
How do you compute the price of a 2-year, zero-coupon T-note?
I would just use a formula and assume a face value of 1000, then P=1000/(1+r)^n
But just looking at the formula I can’t really tell. I mean if you are a foreign investor, and you exchange your own currency to US dollars to be able to buy the bond, then it has currency risk. And regarding the volatility I don’t know but I guess all rates has volatility so yeah I don’t follow the reasoning here.
Thanks in advance!
Anyone?
Volatility risk is present for fixed-income securities that have embedded options, such as call options, prepayment options, or put options. Changes in interest rate volatility affect the value of these options and thus affect the values of securities with embedded options.
Does a zero-coupon bond have embedded options?
Do you see a volatility term in that formula?
That’s exchange rate risk.
By “volatility” here, we mean volatility of (local currency) interest rates.
Ah alright, I thought volatility referred to the price of the bond here and not volatility of local currency interest rates. Then I understand it should be D, it doesn’t have volatility risk.