The risk that a bond's price will decline in response to an increase in interest rates is referred to as

Question

Quizplus · Accepted Answer

Interest rate risk refers to the possibility that the price of a bond will decrease in response to a rise in interest rates. This is because, as interest rates rise, newer bonds with higher yields become available, reducing the demand for existing lower-yielding bonds. Reinvestment risk, on the other hand, refers to the possibility that the proceeds from a bond's coupon or principal payments will need to be reinvested at lower interest rates, thereby reducing future income. Inflation risk refers to the possibility that rising inflation will erode the purchasing power of a bond's future cash flows. Default risk refers to the possibility that the issuer of a bond will default on its payments.

The Risk That a Bond's Price Will Decline in Response