Business, 20.03.2020 10:14 itssamuelu

How many of the following statements are correct? As interest rates increase, longer term bonds will see their prices increase by more than shorter term bonds. Reinvestment rate risk occurs when interest rates fall and coupon payments are reinvested at these lower rates.

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Answer from: Tyrant4life

Reinvestment rate risk occurs when interest rates fall and coupon payments are reinvested at these lower rates.

Explanation:

One of the following statements is correct, which is that reinvestment rate risk occurs when interest rates fall and coupon payments are reinvested at these lower rates.

Reinvestment rate risk communicates the fact that coupon payments and earned interest income may not be reinvested at the prevailing market rate, hence the name 'reinvestment risk'

It is false that as interest rates increase, longer term bonds will see their prices increase by more than shorter term bonds because interest rates have an inverse relationship with bond price. As interest rate increases, bond rice falls and the risk of interest rate fluctuations is higher in longer term bonds because they face a higher probability of interest rate fluctuations, hence their price falls more than short term bonds.

Answer from: jjcooper05

As interest rates increase, longer term bonds will see their prices increase by more than shorter term bonds.

Long-term bonds are always subject to greater interest rate risk, which means that changes in the market interest rate will change their market value more than short-term bond. This happens because any change in the market rate will affect them for a longer period of time, e.g. if market rates increase, the market value of long-term bonds will decrease more than short-term bonds.

Reinvestment rate risk occurs when interest rates fall and coupon payments are reinvested at these lower rates.

Reinvestment risk refers to the risk that coupon payments will not be invested at the same coupon rate. As market rates decrease, reinvestment risk increases because money received as coupon payments will yield lower interests than the bond itself.

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How many of the following statements are correct? As interest rates increase, longer term bonds will...