6. Risks of investing in bonds The higher the risk of a security, the higher its expected return will be. A bond's risk level is reflected in its yield, but understanding the different risks involved when investing in bonds is important. The following graph shows the relationship between interest rates and maturity for three security classes: US Treasury securities (USTS), AA-rated corporate bonds, and BBB-rated corporate bonds. Use the selection dropdown lists to correctly associate each curve with its corresponding security class: A B с YIELD (%) 15 12 9 6 3 0 5 10 Interest rate risk Reinvestment risk True 15 False 20 YEARS TO MATURITY 25 30 Frank Barlowe is retiring soon, so he's concerned about his investments providing him with a steady income every year. He's aware that if interest rates , the potential earnings power of the cash flow from his investments will increase. In particular, he is concerned that a decline in interest rates might lead to annual income from his investments. What kind of risk is Frank most concerned about protecting against? A B C Answer the following question based on your understanding of interest rate risk and reinvestment risk. True or False: Assuming all else is equal, long-term securities are exposed to higher interest rate risk than short-term securities.
6. Risks of investing in bonds The higher the risk of a security, the higher its expected return will be. A bond's risk level is reflected in its yield, but understanding the different risks involved when investing in bonds is important. The following graph shows the relationship between interest rates and maturity for three security classes: US Treasury securities (USTS), AA-rated corporate bonds, and BBB-rated corporate bonds. Use the selection dropdown lists to correctly associate each curve with its corresponding security class: A B с YIELD (%) 15 12 9 6 3 0 5 10 Interest rate risk Reinvestment risk True 15 False 20 YEARS TO MATURITY 25 30 Frank Barlowe is retiring soon, so he's concerned about his investments providing him with a steady income every year. He's aware that if interest rates , the potential earnings power of the cash flow from his investments will increase. In particular, he is concerned that a decline in interest rates might lead to annual income from his investments. What kind of risk is Frank most concerned about protecting against? A B C Answer the following question based on your understanding of interest rate risk and reinvestment risk. True or False: Assuming all else is equal, long-term securities are exposed to higher interest rate risk than short-term securities.
Fundamentals of Financial Management, Concise Edition (with Thomson ONE - Business School Edition, 1 term (6 months) Printed Access Card) (MindTap Course List)
8th Edition
ISBN:9781285065137
Author:Eugene F. Brigham, Joel F. Houston
Publisher:Eugene F. Brigham, Joel F. Houston
Chapter8: Risk And Rates Of Return
Section: Chapter Questions
Problem 9Q: In Chapter 7, we saw that if the market interest rate, rd, for a given bond increased, the price of...
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Transcribed Image Text:6. Risks of investing in bonds
The higher the risk of a security, the higher its expected return will be. A bond's risk level is reflected in its yield, but understanding the different risks
involved when investing in bonds is important.
The following graph shows the relationship between interest rates and maturity for three security classes: US Treasury securities (USTS), AA-rated
corporate bonds, and BBB-rated corporate bonds. Use the selection dropdown lists to correctly associate each curve with its corresponding security
class:
A
B
с
YIELD (%)
15
12
9
6
3
0
5
10
Interest rate risk
Reinvestment risk
True
15
False
20
YEARS TO MATURITY
25
30
Frank Barlowe is retiring soon, so he's concerned about his investments providing him with a steady income every year. He's aware that if interest
rates
, the potential earnings power of the cash flow from his investments will increase. In particular, he is concerned that a decline in
interest rates might lead to annual income from his investments. What kind of risk is Frank most concerned about protecting against?
A
B
C
Answer the following question based on your understanding of interest rate risk and reinvestment risk.
True or False: Assuming all else is equal, long-term securities are exposed to higher interest rate risk than short-term securities.
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