Question

Please match each of the following terms to the description of best fit.

a. Risk associated with price fluctuations caused by interest rate changes B.
b. This is the risk that a firm's cost of debt will fall and as a result reinvested coupon payments will earn less yield moving forward.
c. Risk that the Borrower will not make payments on time or in full D.
d. Coupon Payments typically follow a benchmark market rate E.
e. All of the yield is determined by the difference in the price of the bond and the par value F.
f. Can be assessed using the perpetuity formula

1. Interest Rate Risk
2. Reinvestment Risk
3. Default Risk
4. Floating rate bond
5. Zero Coupon Bond
6. Consol Bond

Answer 1

1. Interest Rate Risk ⇒ Risk associated with price fluctuations caused by interest rate changes.

2. Reinvestment Risk ⇒ This is the risk that a firm's cost of debt will fall and as a result reinvested coupon payments will earn less yield moving forward.

3. Default Risk ⇒ Risk that the Borrower will not make payments on time or in full.

4. Floating rate bond ⇒ Coupon Payments typically follow a benchmark market rate.

5. Zero Coupon Bond ⇒ All of the yield is determined by the difference in the price of the bond and the par value.

6. Consol Bond ⇒ Can be assessed using the perpetuity formula.