Interest rate risk refers to:
A)the risk-free rate of interest.
B)the risk premium demanded on a bond in case of default.
C)the random behaviour of past bond prices.
D)the unforeseen losses to an investor if interest rates change.

Question

Quizplus · Accepted Answer

Interest rate risk refers to the possibility of losses for an investor due to unanticipated changes in interest rates. As interest rates change, bond prices tend to fluctuate, which can result in gains or losses for the investor holding the bond. If interest rates rise, the value of existing bonds falls, and vice versa. Therefore, D is the best choice.

Interest Rate Risk Refers To