An effect of interest rate risk and investment risk on a bond's yield is classified as_________?
Correct answer: C. Maturity risk premium
- A. Reinvestment premium
- B. Investment risk premium
- C. Maturity risk premium
- D. Defaulter's premium
Explanation
The maturity risk premium compensates investors for risks that increase with the time to maturity, including interest-rate and reinvestment risk. Default risk premium instead compensates for the possibility that the issuer will fail to pay.
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Business finance explains how organisations plan, obtain and use money while balancing risk, return and liquidity. Topics include financial statements, time value of money, budgeting, working capital, capital structure, sources of finance, investment appraisal and cost of capital. Capital budgeting evaluates long-term projects, whereas working capital manages day-to-day operations.
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