Question: 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

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.

Both bonds have equal interest rate risk.

The 10-year bond has more interest rate risk.

Which type of bonds offer a higher yield?

Callable bonds

Noncallable bonds

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

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

True

False

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