Which of the Following Statements About Interest Rate and Reinvestment

question 9

Multiple Choice

Which of the following statements about interest rate and reinvestment rate risk is CORRECT?

• 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.
• E) Interest rate risk can never be reduced.

Determine the necessary initial investment to achieve desired future payments or perpetuities.

Interpret the impact of different interest rates and compounding frequencies on investments and payments.

Analyze the financial feasibility of long-term payment plans and trust funds.

Utilize formulas for growing annuities and perpetuities to resolve real-life financial planning scenarios.

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