Which of the following statements about interest rate and reinvestment rate risk

Question

Which of the following statements about interest rate and reinvestment rate risk is CORRECT? 1. Reinvestment rate risk can be eliminated by holding variable (or floating) rate bonds. 2. Interest rate price risk can be eliminated by holding zero coupon bonds. 3. Interest rate risk can never be reduced. 4. Interest rate price risk exists because fixed-rate debt securities lose value when interest rates rise, while reinvestment rate risk is the risk of earning less than expected when interest payments or debt principal are reinvested. 5. Variable (or floating) rate securities have more interest rate (price) risk than fixed rate securities.

Explanation / Answer

2. Interest rate price risk can be eliminated by holding zero coupon bonds

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