Given an Understanding of Interest-Rate Risk, an Existing Fixed-Interest Investor

question 6

Multiple Choice

Given an understanding of interest-rate risk, an existing fixed-interest investor in bonds would be affected in which of the following way(s) if the market interest rates on bonds were to rise from 8% to 10%?

• A) interest receipts from the bonds would rise and the market price of the bond would also rise
• B) interest receipts from the bonds would fall and the market price of the bond would also fall
• C) interest receipts from the bonds would be unaffected and the market price of the bond would rise
• D) interest receipts from the bonds would be unaffected and the market price of the bond would fall

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Definitions:

NPV Calculations

The process of determining the net present value of cash flows by discounting them to the present value using a specific rate.

Carbon Tax

A tax imposed on carbon dioxide emissions, designed to reduce the use of fossil fuels and lower greenhouse gas emissions.

Stock Dissipation Rate

The rate at which a stock or resource diminishes due to use or other factors.

Net Present Value

A method used in finance to assess the value of an investment by calculating the present value of its expected future cash flows minus the initial investment.