Which of the Following Statements Best Describes Interest Rate and Reinvestment

question 13

Multiple Choice

Which of the following statements best describes interest rate and reinvestment rate risk?

• A) Variable (or floating) rate securities have more interest rate (price) risk than fixed rate securities.
• B) Interest rate price risk exists because fixed-rate debt securities lose value when interest rates rise, while reinvestment rate risk is the risk of earning less than expected when interest payments or debt principal are reinvested.
• C) Interest rate price risk can be eliminated by holding zero coupon bonds.
• D) Reinvestment rate risk can be eliminated by holding variable (or floating) rate bonds.

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Definitions:

Portfolio Variances

Measures the dispersion of average returns of a portfolio from its mean, indicating the level of risk involved.

Expected Return

The estimated average return on an investment, accounting for the probabilities of each possible outcome.

Undiversifiable Risk

A type of risk inherent to the entire market or market segment that cannot be mitigated through diversification.

Beta Coefficient

The beta coefficient measures the volatility of an investment in relation to the market as a whole, indicating its relative risk.