8. Risks of investing in bonds

The higher the risk of a security, the higher its expected return will be. A bonds risk level is reflected in its yield, but understanding the different risks involved when investing in bonds is important.

The following graph shows the relationship between interest rates and maturity for three security classes: US Treasury securities (USTs), AA-rated corporate bonds, and BBB-rated corporate bonds. Use the selection dropdown lists to correctly associate each curve with its corresponding security class:

A
B
C

Which type of bonds offer a higher yield?

Noncallable bonds

Callable bonds

Answer the following question based on your understanding of interest rate risk and reinvestment risk.

True or False: Assuming all else is equal, the shorter a bonds maturity, the more its price will change in response to a given change in interest rates.

False

True