Changes in interest rates affect bond prices.Which one of the following compensates bond investors for this risk?

Question

Quizplus · Accepted Answer

The interest rate risk premium compensates bond investors for the risk of changes in interest rates. As interest rates increase, bond prices decrease and vice versa. Therefore, this premium is added to the bond's required rate of return to compensate for the risk associated with changes in interest rates. The other options listed are compensation for other types of risks, such as default risk (B), taxability risk (C), and inflation risk (A). Bond premium (E) refers to the amount by which a bond's market price exceeds its face value.

Changes in Interest Rates Affect Bond Prices