if interest rates********** increase/decrease interest rates might lead to less
ID: 2743597 • Letter: I
Question
if interest rates********** increase/decrease interest rates might lead to less /more A security with higher risk will have a higher expected return. A bond's risk level is reflected in its yield, but understanding the different risks involved when investing in bonds is important. The curves on the following graph show the prices of two 10% annual coupon bonds at various interest rates BOND VALUE ($ 2000 1750 1500 1250 1000 1-Year Bond 750 500 10-Year Bond 250 12 20 INTEREST RATE 1%] Based on the graph, which of the following statements is true? Neither bond has any interest rate risk The 1-year bond has more interest rate risk The 10-year bond has more interest rate risk Both bonds have equal interest rate risk Frank Barlowe is retiring soon, so he is concerned about his investments providing him steady income every year. He is aware that if interest rates increase. In particular, he is concerned that a decline in interest rates might lead to his investments. What kind of risk is Frank most concerned about protecting against? , the potential earnings power of the cash flow from his investments will annual income from O Interest rate risk Reinvestment rate riskExplanation / Answer
a)
Interest Rate Risk- When interest rate raises, price of fixed rate bonds fall. This is known as interest rate risk. Market interest rates and bond prices generally move in inversely. Maturity period also affects interest rate risk.
Bonds having longer maturity associated with greater interest rate risk, because value of such bond could be impacted by changing interest rates prior to maturity. This will put negative impact on the price of bond..
Answer- based on above explanation option 3 is correct answer.
“The 10 year bond has more interest rate risk.”
b)
b)
interest rates -decreases.
decline in interest rates- more annual income.
Frank is more concerned about the interest rate risk.
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