Interest-rate risk can best be characterized as the risk that
A) you could have earned a higher interest rate if you waited to purchase a bond.
B) fluctuations in the price of a financial asset in response to changes in market interest rates.
C) you could have gotten a lower interest rate if you waited to lock in a mortgage.
D) short-term interest rates may exceed long-term interest rates.

Question

Quizplus · Accepted Answer

Interest-rate risk refers to the potential for fluctuations in the price of a financial asset in response to changes in market interest rates. This risk is particularly relevant for fixed-income securities, such as bonds, whose prices tend to move inversely with interest rates. As interest rates rise, bond prices tend to fall, and as interest rates fall, bond prices tend to rise. Therefore, investors who hold bonds or other fixed-income securities face the risk that their investments may lose value if interest rates rise.

Interest-Rate Risk Can Best Be Characterized as the Risk That