The higher the risk of a security, the higher its expected reburn will be. A bon
ID: 1171269 • Letter: T
Question
The higher the risk of a security, the higher its expected reburn will be. A bond's risk level is refected in its yield, but understanding the different risks involved when investing inbonds is important. The follawing graph shows the relatianship between interest rates and maturity for three security cdasses: U.S Treasury securities (USTs), AA-rated corporate bonds, and BBB-rated corporate bonds. Use the dropdown menus to label each security's profile correcty: YIELD 20 25 30 YEARS TO MATURITY Is the default spread between the corporate bonds and the Treasury securities greater for shorter or longer maturities? O short-term maturities O Long-term maturities Answer the following question based on your understanding of interest rate risk and reinvestment rate risk. True or False: Assuming all else is equal, shart-term securities are exposed to higher reinvestment rate risk than long-term securities O True O FalseExplanation / Answer
1-
Is the default spread between the corporate bonds and treasury bonds greater for shorter or longer maturities
Longer
because as the maturity period will increase default spread will increase
2-
Assuming all else is equal, short-term securities are exposed to higher reinvestment rate risk than long-term securities.
TRUE
because in short term bonds would be exposed to more price risk and reinvestment risk
1-
Is the default spread between the corporate bonds and treasury bonds greater for shorter or longer maturities
Longer
because as the maturity period will increase default spread will increase
2-
Assuming all else is equal, short-term securities are exposed to higher reinvestment rate risk than long-term securities.
TRUE
because in short term bonds would be exposed to more price risk and reinvestment risk
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