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1.
Which of the following best describes interest rate risk?
Rising interest rates will make bonds less valuable. The higher that interest rates go, the less attractive fixed-rate bonds will be on the secondary market.
2.
In which of the following ways is a bond's duration expressed?
As a number of years. A bond's duration is expressed as a number of years from the purchase date.
3.
Shorter bond maturities mean longer bond durations.
False. Longer, not shorter, bond maturities mean longer durations. Imagine a fixed amount of money--for example, $1,000--being mailed to you in small payments over time. If these payments were spread over a one-year period, you would recover your money faster than if the same dollar amount were spread over a five-year period.
4.
The concept of present value states that a specified sum of money received today will be worth less than the same amount received at some point in the future.
False. Present value is based on the concept that a specified sum of money received today will be worth more--not less--than the same amount received at some point in the future.
5.
Investment risk is the threat that _______.
If interest rates fall, the interest payments and principal the investor receives will have to be reinvested at lower rates. This is a common fear among bond investors.
