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. Q1. 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: Select one of the three options for A, B, and C Option A: BBB or UST or AA Option B: AA or BBB or UST Option C: AA or UST or BBB 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 Q2._____, 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 Q3.____annual income from his investments. What kind of risk is Frank most concerned about protecting against? Select the below options: a. Interest rate risk b. Reinvestment risk Q4. 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. a. True b. False Q2. Option 1: Increase or Decrease Q3. Option 1: More or Less Please check the provided graph image for more information and options provided for Q2 and Q3.
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. Q1. 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: Select one of the three options for A, B, and C Option A: BBB or UST or AA Option B: AA or BBB or UST Option C: AA or UST or BBB 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 Q2._____, 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 Q3.____annual income from his investments. What kind of risk is Frank most concerned about protecting against? Select the below options: a. Interest rate risk b. Reinvestment risk Q4. 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. a. True b. False Q2. Option 1: Increase or Decrease Q3. Option 1: More or Less Please check the provided graph image for more information and options provided for Q2 and Q3.
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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Question
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.
Q1. 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: Select one of the three options for A, B, and C
Option A: BBB or UST or AA
Option B: AA or BBB or UST
Option C: AA or UST or BBB
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 Q2._____, 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 Q3.____annual income from his investments. What kind of risk is Frank most concerned about protecting against? Select the below options:
a. Interest rate risk
b. Reinvestment risk
Q4. 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.
a. True
b. False
Q2. Option 1: Increase or Decrease
Q3. Option 1: More or Less
Please check the provided graph image for more information and options provided for Q2 and Q3.
![YIELD [%]
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YEARS TO MATURITY
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Transcribed Image Text:YIELD [%]
15
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