Interest rate risk is comprised of which of the following risks?

Question

Quizplus · Accepted Answer

Interest rate risk is the risk of a change in market interest rates affecting the value of a fixed income investment. Price risk (A) is the risk that the value of the investment will decline due to an increase in interest rates. Coupon reinvestment risk (B) is the risk that cash flows from coupon payments will need to be reinvested at lower rates, resulting in lower returns. Default risk (C) is the risk that the issuer of the bond will default on payments. Default risk is not directly related to interest rate risk, so (E) is not the best choice. Therefore, the best choice is (D), which includes price risk and coupon reinvestment risk.

Interest Rate Risk Is Comprised of Which of the Following