Question

Which of the following statements about interest rate risk is correct?

Select one:

a. all of these statements are correct.

b. it is the magnitude of the yield change for a given movement in market interest rates.

c. it is the magnitude of the price change for a given movement in coupon rates.

d. it is the magnitude of the price change for a given movement in market interest rates.

Answer 1

Interest rate risk is the risk of change in market price of the security(generally bond) due to the change in interest rate.

If the interest rate rises, price of the bond falls and vice versa. Because the cash flow from bond(i.e. interest and face value) if discounted from higher risk free rate would render lower present value of cash inflows hence price of bond shall be reduced.

But the interest rate dose not affect yield on the bond because bondholder will get the same period interest and face vale at maturity.

So the answer should be:

(C). it is the magnitude of the price change for a given movement in coupon rates.

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