Define interest rate risk. How does a bond's level of interest rate risk depend on its maturity?
What will be an ideal response?
Interest rate risk is the risk of changing (especially falling) bond prices from changing (especially rising) interest rates.
If interest rates rise the bond's cash flows are discounted at a higher rate, thus the present value of its cash flows fall,
thus its price falls. The longer the maturity, the greater the interest rate risk, because the distant cash flows are
discounted a greater number of periods, and thus lose more value (or gain more value if interest rates fall).
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The brand promise for ________ is "the product you buy is of highest esteem, based on its timeliness, elegant design and the high quality, which is derived from the excellence of our craftsmen."
A) Hermés B) Montblanc C) Patrón D) Sub-zero Refrigerators E) Armani