As You Read and Think About This Test Question, It

question 132

Multiple Choice

As you read and think about this test question, it is stored in

• A) long-term memory.
• B) working memory.
• C) sensory memory.
• D) the information processor.

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Definitions:

Default Risk

The risk that a borrower will not pay the interest and/or principal on a loan as it becomes due. If the issuer defaults, investors receive less than the promised return on the bond. Default risk is influenced by both the financial strength of the issuer and the terms of the bond contract, especially whether collateral has been pledged.

Interest Rate Risk

Arises from the fact that bond prices decline when interest rates rise. Under these circumstances, selling a bond prior to maturity will result in a capital loss; the longer the term to maturity, the larger the loss.

Real Return Bonds

Bonds issued by the federal government that offer inflation protection to investors.

Income Bonds

These are a type of debt security where interest payments depend on the issuer's earnings, meaning if the issuer's earnings are insufficient, the bondholders may not receive interest payments.