If Interest Rates Increase Because of a Previously Unanticipated Inflation

question 73

Multiple Choice

If interest rates increase because of a previously unanticipated inflation rate risk:

• A) long-lived debt instruments will decline more than short-lived debt instruments
• B) long-lived debt instruments will decline less than short-lived debt instruments
• C) neither set of debt instruments will decline
• D) all other things being equal, both should decline equally

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Definitions:

Investments

The act of allocating resources, usually money, with the expectation of generating an income or profit.

Risk-averse

Describes an individual's preference for certainty or guaranteed outcomes over uncertainty or potential losses.

Marginal Utility

The additional satisfaction a consumer gains from consuming one more unit of a good or service.

Income

The money received, especially on a regular basis, for work or through investments.