The price effect and the reinvestment effect are both sources of:
A)default risk.
B)term structure.
C)interest rate risk.
D)default risk structure.

Question

Quizplus · Accepted Answer

The price effect and the reinvestment effect are both sources of interest rate risk. The price effect refers to the impact that changes in market interest rates have on the value of a fixed income security. The reinvestment effect refers to the impact that changes in market interest rates have on the cash flows generated by a fixed income security. Both effects can result in losses or gains for investors, depending on the direction of interest rate movements. Therefore, the correct answer is C.

The Price Effect and the Reinvestment Effect Are Both Sources