Question

Which of the following best describes interest rate risk? The risk that a bond issuer will...

Which of the following best describes interest rate risk?

The risk that a bond issuer will default on the promised coupon payments of a bond.

The risk that the periodic coupon payments received from a bond cannot be reinvested at the same rate of return.

The inverse relationship between changes in interest rates and the price of a fixed income security.

The risk that the purchasing power of periodic coupon payments received will diminish over a long period of time.

Homework Answers

Answer #1

The risk that a bond issuer will default on the promised coupon payments of a bond is Default risk

The risk that the periodic coupon payments received from a bond cannot be reinvested at the same rate of return is reinvestment risk.

The inverse relationship between changes in interest rates and the price of a fixed income security is interest rate risk.

The risk that the purchasing power of periodic coupon payments received will diminish over a long period of time is inflation risk.

Therefore 3rd option is correct.

Thumbs up please if satisfied. Thanks :)

Comment if further doubts in above.

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
Match the following terms to the definition. Interest Rate Risk Reinvestment Rate Risk Default Risk Floating...
Match the following terms to the definition. Interest Rate Risk Reinvestment Rate Risk Default Risk Floating rate bond Zero Coupon Bond Consol Bond A. Risk associated with price fluctuations caused by interest rate changes B. This is the risk that a firm's cost of debt will fall and as a result reinvested coupon payments will earn less yield moving forward. C. Risk that the Borrower will not make payments on time or in full D. Coupon Payments typically follow a...
Please match each of the following terms to the description of best fit. A. Risk associated...
Please match each of the following terms to the description of best fit. A. Risk associated with price fluctuations caused by interest rate changes B. This is the risk that a firm's cost of debt will fall and as a result reinvested coupon payments will earn less yield moving forward. C. Risk that the Borrower will not make payments on time or in full D. Coupon Payments typically follow a benchmark market rate E. All of the yield is determined...
Please match each of the following terms to the description of best fit. \ Reinvestment Rate...
Please match each of the following terms to the description of best fit. \ Reinvestment Rate Risk Default Risk Floating rate bond Zero Coupon Bond Consol Bond A. Risk associated with price fluctuations caused by interest rate changes B. This is the risk that a firm's cost of debt will fall and as a result reinvested coupon payments will earn less yield moving forward. C. Risk that the Borrower will not make payments on time or in full D. Coupon...
Which of the following describes the relationship between stock and bond prices and interest rates? There...
Which of the following describes the relationship between stock and bond prices and interest rates? There is a direct and positive relationship between the rate of interest and stock and bond prices. (As interest go up, stock and bond prices rise as well.) The relationship is far too difficult to quantify. There is an inverse relationship between interest rates and the price of a stock or a bond. (As interest rates go up, stock and bond prices decline.) It varies...
Which of the following best describes a convertible bond issue? a. a bond that can be...
Which of the following best describes a convertible bond issue? a. a bond that can be converted into a currency other than the one it was issued in b. a bond that offers a fixed rate coupon that can be converted into a variable rate coupon c. a bond that offers the investor the option of converting his or her bond into a fixed number of common shares within a predetermined period of time d. a bond that offers investors...
Which of the following Theorems is NOT one of Malkiel's Theorems regarding the relationship between YTM...
Which of the following Theorems is NOT one of Malkiel's Theorems regarding the relationship between YTM and bond prices? a. The yield curve is generally upward sloping. b. Longer-term bonds are more volatile than shorter-term bonds. c. Lower coupon bonds are more volatile than higher coupon bonds. d. Bond prices move inversely to bond yields. Eric purchased a 12-year, 7% coupon bond that is callable in three years. Which type of duration is the best for Eric to use to...
Which of the following best describes a foreign bond? A bond issued internationally within the jurisdiction...
Which of the following best describes a foreign bond? A bond issued internationally within the jurisdiction of the country whose currency the bond is denominated. A bond issued internationally, outside the jurisdiction of the country in whose currency the bond is denominated. A bond issued by quasi-government securities. A bond issued by a multilateral agency like the International Monetary Fund. A bond backed by the full faith and credit of the issuer. A bond issued whose sources for paying interest...
1. Which one of the following bonds has the greatest interest rate risk? a. 10-y &...
1. Which one of the following bonds has the greatest interest rate risk? a. 10-y & 2% coupon b. 20-y & 3% coupon c. 20-y & 4% coupon d. 20-y & 2% coupon 2. There are two methods used to amortize a loan: fixed principal payment vs. fixed total payment. Under the fixed principal payment approach, what is the observation on the periodic interest payment? a. The interest payment is increasing over time. b. The interest payment is decreasing over...
19, Interest Rate Risk The Faulk Corp. has a 7 percent coupon bond outstanding. The Yoo...
19, Interest Rate Risk The Faulk Corp. has a 7 percent coupon bond outstanding. The Yoo Company has an 11 percent bond outstanding. Both bonds have 12 years to maturity, make semiannual payments, and have a YTM of 9 percent. If interest rates suddenly rise by 2 percent, what is the percentage change in the price of these bonds? What if interest rates suddenly fall by 2 percent instead? What does this problem tell you about the interest rate risk...
Suppose you observe that 90–day interest rate across the eurozone is 5%, while the interest rate...
Suppose you observe that 90–day interest rate across the eurozone is 5%, while the interest rate in the U.S. over the same time period is 3%. Further, the spot rate and the 90–day forward rate on the euro are both $1.25. You have $500,000 that you wish to use in order to engage in covered interest arbitrage. Which of the following best describes covered interest arbitrage? a)Using forward contracts to mitigate default risk, while attempting to capitalize on equal interest...