Question: Explain why it is the case that bond prices fluctuate in response to changing interest rates. What adverse effect might occur if bond prices remain

  1. Explain why it is the case that bond prices fluctuate in response to changing interest rates.

What adverse effect might occur if bond prices remain fixed prior to their maturity?

  1. What is meant by default risk in bonds, and how do investors respond to it?
  2. Why do bonds exhibit interest rate risk?
  3. Why do investors pay attention to bond ratings and demand a higher interest rate for bonds with low ratings?
  4. How much would an investor lose if she purchased a 30-year zero-coupon bond with a $1,000 par value and 10% yield to maturity, only to see market interest rates increase to 12% one year later?

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