Question: An analyst made the following statement: We should purchase Treasury notes because they are risk-free. Default risk is essentially non-existent. Is this analyst's statement correct

An analyst made the following statement: "We should purchase Treasury notes because they are risk-free. Default risk is essentially non-existent." Is this analyst's statement correct with respect to:

	A.	Risk-free? No; Default risk? No
	B.	Risk-free? No; Default risk? Yes
	C.	Risk-free? Yes; Default risk? No
	D.	None of the above

John Smith and Jane Brody are assistant portfolio managers. The senior portfolio manager has asked them to consider the acquisition of one of two option-free bond issues with the following characteristics:

Issue 1 has a lower coupon rate than Issue 2

Issue 1 has a shorter maturity than Issue 2

Both issues have the same credit rating.

Smith and Brody are discussing the interest rate risk of the two issues. Smith argues that Issue 1 has greater interest rate risk than Issue 2 because of its lower coupon rate. Brody counters that Issue 2 has greater interest rate risk because it has a longer maturity than Issue 1.

Which assistant portfolio manager is correct with respect to their selection to the issue with the greater interest rate risk?

	A.	John Smith
	B.	Jane Brody
	C.	Both assistant portfolio managers are correct
	D.	None of the above

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