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Bond 1 is a 5-year zero-coupon bond. Bond 2 is a 5-year bond with a 4% coupon rate. Bond 3 is a 3-year bond with
Bond 1 is a 5-year zero-coupon bond. Bond 2 is a 5-year bond with a 4% coupon rate. Bond 3 is a 3-year bond with a 4% coupon rate. Assume all three bonds have a face value of $1,000 and are annually compounded. List the three bonds in order of their sensitivity to interest rate risk from least sensitive to most sensitive. Specifically, identify which bond is the most risky and which bond is the least risky.
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