A security with higher risk will have a higher expected return. A bond's 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. BOND VALUE $1 2000 1750 1500 1250 1000 1-Year Bond 750 500 10-Year Bond 250 0 4 8 12 16 20 INTEREST RATE % Based on the graph, which of the following statements is true? The 1-year bond has more interest rate risk. The 10-year bond has more interest rate risk. Neither bond has any interest rate risk. Both bonds have equal interest rate risk. 1 An investor is concerned that a decline in interest rates might lead to annual income from her investments. If interest rates , the value of earnings from her investments will increase. If her goal is to save for retirement, which of the following bonds poses the biggest risk? A 20-year zero-coupon bond A 20-year, 10% coupon bond A 30-year, 10% coupon bond A 20-year, 10% coupon bond that may be called in 10 years Answer the following question based on your understanding of interest rate risk and reinvestment rate risk. True or False: Assuming all else is equal, the shorter a bond's maturity, the more its price will change in response to a given change in interest rates. False True