8. Risks of Investing in bonds

The curves on the following graph show the prices of two 10% annual coupon bonds at various interest rates. BOND VALUE I$) 2000 1750 1500 1250 1000 750 500 250 1-Year Bond 10-Year Bond 16 20 INTEREST RATE 1%] Based on the graph, which of the following statements is true? O The 10-year bond has more interest rate risk. The 1-year bond has more interest rate risk. O Neither bond has any interest rate risk. Both bonds have equal interest rate risk. Frank Barlowe is retiring soon, so he is concerned about his investments providing him steady income every year. He is aware that if interest rates increase. In particular, he is concerned that a decline in interest rates might lead to his investments. What kind of risk is Frank most concerned about protecting against? , the potential earnings power of the cash flow from his investments will annual income from Reinvestment rate risk O Interest rate risk Answer the following question based on your understanding of interest rate risk and reinvestment rate risk. True or False: Assuming all else is equal, long-term securities are exposed to higher interest rate risk than short-term securities rue False