Capital Risk

Capital risk is the risk that the value of your investment will be different from what you expect at the time of redemption/sale. You are not told what is the timeframe of your investment, but the book was publish in 2007, so the second bond will be a very short one and therefore the capital risk is virtually non-existent, so that would be the obvious choice. Two other issues to note:

· Because the Treasury is for 2020, which is 13 years into the future, it intends to indicate that the probability that you’ll need the capital prior to maturity is high, thus making the capital risk higher

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· For two bonds of the same maturity, as a rule the one with the lowest coupon rate (unless it is too low and therefore potentially much lower than market rates, which is not the case with a 5% rate) is the one with the lowest capital risk and the price volatility will be lower.

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