Question

True or False: Rising interest rates will cause firms to issue new debt and buy back their Callable bonds early.

True or False: An investor with a long investment horizon is faced with a high degree of reinvestment risk but little price risk

Answer 1

1. Rising interest rates will cause firms to issue new debt and buy back their Callable bonds early.

False.

If companies expect market interest rates to fall, they may issue the bond as callable, allowing them to make an early redemption and secure other financings at a lowered rate.

2. An investor with a long investment horizon is faced with a high degree of reinvestment risk but little price risk.

False.

An investor with a long invstment horizon is faced with a lower degree of reinvestment risk, but higher price risk. If the market interest rates were to rise in the long term, price of the bonds would fall.