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

The curves on the following graph show the prices of two 10% annual coupon bonds at various interest rates.

Based on the graph, which of the following statements is true?

Neither bond has any interest rate risk.

The 1-year bond has more interest rate risk.

The 10-year bond has more interest rate risk.

Both bonds have equal interest rate risk.

Frank Barlowe is retiring soon, so hes concerned about his investments providing him with a steady income every year. Hes aware that if interest rates , the potential earnings power of the cash flow from his investments will increase. In particular, he is concerned that a decline in interest rates might lead to annual income from his investments. What kind of risk is Frank most concerned about protecting against?

Interest rate risk

Reinvestment risk

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

True or False: Assuming all else is equal, short-term securities are exposed to higher reinvestment risk than long-term securities.

True

False