Which type of risk is most significant for bonds? A. Default risk B. Interest rate risk C. Reinvestment rate risk D. Maturity risk | Homework.Study.com (2024)

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Which type of risk is most significant for bonds? A. Default risk B. Interest rate risk C. Reinvestment rate risk D. Maturity risk | Homework.Study.com? ›

Correct Answer: Option B. Interest rate risk is the most important type of risk for bonds.

Call risk is the worst form of reinvestment risk. Instead of just reinvesting interest received at lower rates of return, the investor must reinvest interest plus the principal they receive when the bond is called. Because the investor is reinvesting a larger amount of capital, call risk is a very substantial risk.

Risk Considerations: The primary risks associated with corporate bonds are credit risk, interest rate risk, and market risk.

High-yield or junk bonds typically carry the highest risk among all types of bonds. These bonds are issued by companies or entities with lower credit ratings or creditworthiness, making them more prone to default.

Long term bonds are most sensitive to interest rate changes.

Risk #1: When interest rates fall, bond prices rise. Risk #2: Having to reinvest proceeds at a lower rate than what the funds were previously earning. Risk #3: When inflation increases dramatically, bonds can have a negative rate of return.

Interest rate risk

If interest rates rise, bond prices usually decline. That's because new bonds are likely to be issued with higher yields as interest rates increase, making the old or outstanding bonds less attractive.

The likelihood that the bond's issuer will fail to meet the requirements of timely interest payment and repayment of principal to investors is called default risk. Investors should work with a to evaluate a bond's default risk.

Answer: d) junk bonds

Bonds that have the greatest credit risk are junk bonds. Junk bonds refer to very low-rated, sometimes unrated, bonds issued by a private corporation or a country.

Interest rate risk is the potential that a change in overall interest rates will reduce the value of a bond or other fixed-rate investment: As interest rates rise bond prices fall, and vice versa. This means that the market price of existing bonds drops to offset the more attractive rates of new bond issues.

Which bond has the highest default risk? ›

Key Takeaways

High-yield bonds tend to have lower credit ratings of below BBB- from Standard & Poor's and Fitch, or below Baa3 from Moody's. Junk bonds are more likely to default and have higher price volatility.

Bonds in general are considered less risky than stocks for several reasons: Bonds carry the promise of their issuer to return the face value of the security to the holder at maturity; stocks have no such promise from their issuer.

Treasuries are generally considered"risk-free" since the federal government guarantees them and has never (yet) defaulted. These government bonds are often best for investors seeking a safe haven for their money, particularly during volatile market periods. They offer high liquidity due to an active secondary market.

Generally, corporate bonds carry more risk than U.S. government bonds or municipal bonds. They are usually categorized by years to maturity as follows: Short-term: one to five years; Intermediate-term: five to 15 years; and.

The answer is c. A 10-year, $1,000 face value, zero coupon bond. A bond with a longer duration, all else being equal, will have greater interest rate risk. All else the same, a bond has a longer duration if the following is true, the bond has a longer time to maturity or the bond has a lower coupon rate.

Treasury Bonds

They are considered to be among the safest investments in the world because they are backed by the full faith and credit of the U.S. government. Treasury bonds are often issued with longer terms than other bond types, traditionally clocking in at 10 years or more.

Bonds in general are considered less risky than stocks for several reasons: Bonds carry the promise of their issuer to return the face value of the security to the holder at maturity; stocks have no such promise from their issuer.