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

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