The Increased Volatility of Longer Term Bonds in Response to Interest

question 174

Multiple Choice

The increased volatility of longer term bonds in response to interest rate movements is reflected in the:

• A)pure interest rate.
• B)default risk premium.
• C)liquidity risk premium.
• D)maturity risk premium.

Distinguish between the willingness to sell and the willingness to buy in market dynamics.

Recognize the impact of buyer's inability to distinguish product quality on market prices.

Understand the concept of adverse selection in markets with asymmetric information.

Analyze how market equilibrium is affected by the presence of products of varying quality.

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Definitions:

Increasing

Refers to a situation or quantity that is becoming greater over time.

Annual Growth Rate

The percentage increase in the value of a particular investment or portfolio over the period of a year.

Discounting

The process of determining the present value of a future amount of money or stream of cash flows given a specific rate of return.

Compounded Annually

Interest on an investment that is calculated once a year on both the initial principal and the accumulated interest from previous periods.