Interest rate risk ________ as the time to maturity decreases and ________ as the coupon rate decreases.

Question

Quizplus · Accepted Answer

Interest rate risk is the risk of a change in the value of a security due to a change in interest rates. As the time to maturity decreases, there is less time for interest rates to fluctuate, and therefore, interest rate risk decreases. However, as the coupon rate decreases, the cash flows from the security decrease, making it more sensitive to changes in interest rates. This increases interest rate risk. Therefore, option A is the correct choice.

Interest Rate Risk ________ as the Time to Maturity Decreases