Which of the following statements about interest rate and reinvestment rate risk
ID: 2798849 • Letter: W
Question
Which of the following statements about interest rate and reinvestment rate risk is CORRECT?
Interest rate (price) risk can be eliminated by holding zero coupon bonds.
Variable (or floating) rate securities have less interest rate (price) risk than fixed rate securities.
Interest rate risk can never be reduced.
Interest rate (price) risk does not exist for floating-rate debt securities because they do not lose value when interest rates rise, while fixed-rate debt securities do not have reinvestment rate risk which is the risk of earning less than expected when interest payments or debt principal are reinvested.
Reinvestment rate risk can be eliminated by holding variable (or floating) rate bonds.
a.Interest rate (price) risk can be eliminated by holding zero coupon bonds.
b.Variable (or floating) rate securities have less interest rate (price) risk than fixed rate securities.
c.Interest rate risk can never be reduced.
d.Interest rate (price) risk does not exist for floating-rate debt securities because they do not lose value when interest rates rise, while fixed-rate debt securities do not have reinvestment rate risk which is the risk of earning less than expected when interest payments or debt principal are reinvested.
e.Reinvestment rate risk can be eliminated by holding variable (or floating) rate bonds.
Explanation / Answer
Interest risk is risk associated with increase or decrease in interest rate. The relationship between price of bond and market interest rate is inverse. That is when interest rate rise, price of bond decreases and when interest rate falls bond price increase. So because of change in interest rate, price of bond increase / decrease.
Interest rate (price) risk does not exist for floating-rate debt securities because they do not lose value when interest rates rise, while fixed-rate debt securities do not have reinvestment rate risk which is the risk of earning less than expected when interestpayments or debt principal are reinvested.
Option (C) is correct answer.
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