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Question

Which of the following risk can reduce the value of a bond or other fixed rate investments?

A liquidity risk Correct Answer Incorrect Answer
B interest rate risk Correct Answer Incorrect Answer
C market risk Correct Answer Incorrect Answer
D credit risk Correct Answer Incorrect Answer
E none of the above Correct Answer Incorrect Answer

Solution

Interest rate risk is the risk that the financial value of assets or liabilities (or inflows/outflows) will be altered because of fluctuations in interest rates. For example, the risk that future investment may have to be made at lower rates and future borrowings at higher rates. In case of bonds, the value of the bonds can reduce due to increase in interest rates as the price of bond and interest rates are inversely related.

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