Asked by Deandra Kirkland on Jun 03, 2024
Verified
The interest-rate risk of a bond is
A) the risk related to the possibility of bankruptcy of the bond's issuer.
B) the risk that arises from the uncertainty of the bond's return caused by changes in interest rates.
C) the unsystematic risk caused by factors unique in the bond.
D) the risk related to the possibility of bankruptcy of the bond's issuer, and the risk that arises from the uncertainty of the bond's return caused by changes in interest rates.
E) All of the options are correct.
Interest-Rate Risk
The risk that an investment's value will change due to a change in the absolute level of interest rates, affecting debt securities inversely with respect to their prices and yields.
Unsystematic Risk
The portion of total risk that is specific to a single investment or to a small group of investments, also known as idiosyncratic or specific risk, which can be mitigated through diversification.
Bankruptcy
A legal process in which individuals or businesses unable to meet their financial obligations seek relief from some or all of their debts.
- Gain insight into the key aspects of bond duration and its utility in gauging the risk linked to interest rates.
- Identify strategies for managing interest-rate risk through bond duration.
Verified Answer
JB
Jenna BosserdetJun 03, 2024
Final Answer :
B
Explanation :
Interest-rate risk of a bond refers to the risk that arises from the uncertainty of the bond's return caused by changes in interest rates. This affects the bond's price and yield.
Learning Objectives
- Gain insight into the key aspects of bond duration and its utility in gauging the risk linked to interest rates.
- Identify strategies for managing interest-rate risk through bond duration.