Which of the Following Statements About Interest Rate and Reinvestment

question 3

Multiple Choice

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

• A) 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.
• B) Interest rate price risk can be eliminated by holding zero coupon bonds.
• C) Reinvestment rate risk can be eliminated by holding variable (or floating) rate bonds.
• D) Interest rate risk can never be reduced.
• E) Variable (or floating) rate securities have more interest rate (price) risk than fixed rate securities.

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Definitions:

Ethoxycyclopentane

An organic compound featuring an ethoxy group attached to a cyclopentane ring.

Intermolecular Dehydration

A chemical reaction where water is removed from between two molecules, often leading to the formation of a larger molecule.

Hexan-1-ol

An organic alcohol with a six-carbon chain, where the hydroxyl (-OH) group is attached to the first carbon, commonly used in perfumes and flavorings.

Di-n-Hexyl Ether

An organic compound formed by the dehydration of hexanol, resulting in an ether linkage between two hexyl groups.