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Interest rate risk is important in bond valuation. High coupon bonds are considered safer than otherwise identical bonds with lower coupons with low interest-rate risk.

Interest rate risk is important in bond valuation. High coupon bonds are considered safer than otherwise identical bonds with lower coupons with low interest-rate risk. However, one potentially undesirable feature of high-coupon bonds is to bear the reinvestment risk at prevailing market rates a few years later. Discuss the trade-off between interest rate risk and reinvestment risk using a zero-coupon bond and a high coupon bond as examples.

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