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Consider an investor with a ten (10) year investment horizon. Clearly, the best way for her to lock in the current market yield over her
Consider an investor with a ten (10) year investment horizon. Clearly, the best way for her to lock in the current market yield over her horizon is to buy a zero-coupon bond today with a maturity of ten years. However, we also saw that this zero-coupon bond has the highest interest rate risk among all bonds (including coupon bonds) of the same maturity. How can the same instrument have the highest interest rate risk, and yet assure the investor of a certain yield? Explain without any calculations. (Assume no default risk exists).
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