Risks of investing in bonds A security with higher risk will have a higher expected return. A bond’s risk level is reflected in its yield, but understanding the different risks involved when investing in bonds is important. The curves on the following graph show the prices of two 10% annual coupon bonds at various interest rates. Q1. Based on the graph, which of the following statements is true? a. Neither bond has any interest rate risk. b. The 10-year bond has more interest rate risk. c. Both bonds have equal interest rate risk. d. The 1-year bond has more interest rate risk. Q2. Which type of bonds offer a higher yield? a. Noncallable bonds b. Callable bonds Q3. Answer the following question based on your understanding of interest rate risk and reinvestment risk. True or False: Assuming all else is equal, the shorter a bond’s maturity, the more its price will change in response to a given change in interest rates. a. False b. True Please verify the answer. Previously similar question came out wrong.
Risks of investing in bonds A security with higher risk will have a higher expected return. A bond’s risk level is reflected in its yield, but understanding the different risks involved when investing in bonds is important. The curves on the following graph show the prices of two 10% annual coupon bonds at various interest rates. Q1. Based on the graph, which of the following statements is true? a. Neither bond has any interest rate risk. b. The 10-year bond has more interest rate risk. c. Both bonds have equal interest rate risk. d. The 1-year bond has more interest rate risk. Q2. Which type of bonds offer a higher yield? a. Noncallable bonds b. Callable bonds Q3. Answer the following question based on your understanding of interest rate risk and reinvestment risk. True or False: Assuming all else is equal, the shorter a bond’s maturity, the more its price will change in response to a given change in interest rates. a. False b. True Please verify the answer. Previously similar question came out wrong.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Risks of investing in bonds
A security with higher risk will have a higher expected return. A bond’s risk level is reflected in its yield, but understanding the different risks involved when investing in bonds is important.
The curves on the following graph show the prices of two 10% annual coupon bonds at various interest rates.
Q1. Based on the graph, which of the following statements is true?
a. Neither bond has any interest rate risk.
b. The 10-year bond has more interest rate risk.
c. Both bonds have equal interest rate risk.
d. The 1-year bond has more interest rate risk.
Q2. Which type of bonds offer a higher yield?
a. Noncallable bonds
b. Callable bonds
Q3. Answer the following question based on your understanding of interest rate risk and reinvestment risk.
True or False: Assuming all else is equal, the shorter a bond’s maturity, the more its price will change in response to a given change in interest rates.
a. False
b. True
Please verify the answer. Previously similar question came out wrong.
Transcribed Image Text:This graph illustrates the relationship between bond value and interest rate for two types of bonds: a 1-year bond and a 10-year bond.
**Axes:**
- The horizontal axis represents the interest rate (%) ranging from 0% to 20%.
- The vertical axis represents the bond value in dollars ($), ranging from 0 to 2000.
**Bonds:**
- The **1-year bond** is shown with a yellow line. As interest rates increase, the bond value shows a slight decrease, indicating less sensitivity to interest rate changes.
- The **10-year bond** is represented by a blue line. As the interest rates increase, its value decreases more significantly, demonstrating a greater sensitivity to changes in interest rates.
**Analysis:**
The graph depicts that longer-term bonds (10-year) are more sensitive to interest rate changes compared to shorter-term bonds (1-year). This is a common characteristic of bonds, as longer maturity means more exposure to rate fluctuations over time.
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