Question

Albert just purchased a​ $1,000, 5.4%, 10minusyear bond when he heard about his friend Charlie who just bought a equal quality bond at​ $1,000; 9.5%, 10minusyear bond. What kind of risk did Albert just​ experience?

Answer 1

Answer:

A) interest rate

Explanation:

Interest rate risk refers to the risk of purchasing a bond that offers a certain coupon and then the price of that bond changes due to changes in the market interest rate.

This can work in your favor, if the market interest rate decreases, you will have a bond that pays above market coupon, which will increase the market value of the bond. But if the market interest rate increases, the market value of your bond will decrease, and you will lose money. This is what happened to Albert, since the market interest rate increased, the value of Albert's bond decreased.