The risk that interest rates will increase, and that increase will lead to a decline in the prices of outstanding bonds, is called "interest rate risk," or "price risk."

Question

BlackTom AI · Accepted Answer

Consider the core concept being tested: the relationship between rising interest rates and bond prices. 
Option 1: True. This statement aligns with the fundamental principle in fixed-income markets that when interest rates rise, the prices of existing bonds fall, due to their fixed coupons becoming less attractive compared to new higher-yielding issuances. This inverse relationship is what many refer to as interest rate risk, and it is also commonly described as price risk. 
Option 2: False. This would be incorrect because the described risk clearly matches the established notion of interest rate risk, which encompasses the potential price decline of outstanding bonds when rates move upward. Labeling it as not related to interest rate risk would ignore the standard market mechanism driving bond price changes in response to rate shifts. 
Option 1 revisited with a nuance: not only is the term interest rate risk used, but price risk captures the same phenomenon—the risk that the market value of a bond will decrease due to changes in prevailing interest rates. In practice, these terms are often used interchangeably when discussing the sensitivity of bond prices to rate movements. 
Option 2 (False) can also be seen as conflating other risks (like credit risk or reinvestment risk) with the specific price impact caused by rate changes, which is distinctly about how market yields affect bond valuations. Clarifying that distinction helps prevent misclassification of the risk type. 
Summarizing the conceptual link: the scenario describes the classic inverse relationship between rates and prices, a hallmark of interest rate risk, sometimes called price risk, which makes the statement consistent with standard financial theory.

Business Finance Chapter 06 Quiz

The risk that interest rates will increase, and that increase will lead to a decline in the prices of outstanding bonds, is called "interest rate risk," or "price risk."

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