Question

Frank Barlowe is retiring soon, so he is concerned about his investments providing him steady income every year. He is aware that if interest rates _____, the potential earnings power of the cash flow from his investments will icrease. In particular, he is concerned that a decline in interest rates might lead to _____ annual income from investments. What kind of risk is Frank most concerned about protecting against?a. interest rate riskb. reinvestment rate riskTrue or false: assuming all else is equal, short-term securities are exposed to higher reinvestment rate risk than long-term securities.a. trueb. falso

Answer 1

Answer: He is aware that if interest rates increase, the potential earnings power of the cash flow from his investments will increase. In particular, he is concerned that a decline in interest rates might lead to less annual income from investments.

Frank is most concerned about protecting agains the "b. reinvestment rate risk" because it is the risk that interest rates will fall and therefore the investor must reinvest the cash flows of current assets at a lower rate than he did at the beginning. And as a consequence there is a decrease in income.

True or false: TRUE. Because Cash flows receivable in the short term are closer to being reinvested than cash flows receivable in the long term.