- What is interest rate risk?
- A) The risk of losing customers
- B) The risk of changes in interest rates affecting financial instruments
- C) The risk of fraud
- D) The risk of regulatory changes
- Answer: B) The risk of changes in interest rates affecting financial instruments
- Which type of financial instrument is most affected by interest rate risk?
- A) Stocks
- B) Bonds
- C) Real estate
- D) Commodities
- Answer: B) Bonds
- What happens to the price of a bond when interest rates rise?
- A) The price increases
- B) The price remains unchanged
- C) The price decreases
- D) The price doubles
- Answer: C) The price decreases
- Which of the following is a strategy to mitigate interest rate risk?
- A) Ignoring market trends
- B) Investing solely in long-term bonds
- C) Using interest rate swaps
- D) Concentrating investments in equities
- Answer: C) Using interest rate swaps
- What is the primary cause of interest rate fluctuations?
- A) Changes in consumer behavior
- B) Central bank policies and economic conditions
- C) Seasonal demand
- D) Company performance
- Answer: B) Central bank policies and economic conditions
- Which type of risk is associated with fixed-rate loans?
- A) Credit risk
- B) Liquidity risk
- C) Interest rate risk
- D) Operational risk
- Answer: C) Interest rate risk
- What does the term “duration” refer to in relation to bonds?
- A) The time until a bond matures
- B) A measure of a bond’s sensitivity to interest rate changes
- C) The interest payment frequency
- D) The risk level of the bond
- Answer: B) A measure of a bond’s sensitivity to interest rate changes
- What is the effect of a rise in interest rates on a company’s debt financing?
- A) It decreases the cost of borrowing.
- B) It has no effect.
- C) It increases the cost of borrowing.
- D) It eliminates the need for debt financing.
- Answer: C) It increases the cost of borrowing.
- What is an interest rate swap?
- A) A contract to exchange fixed and floating interest rate payments
- B) A bond with a variable interest rate
- C) A type of equity investment
- D) A loan with no interest
- Answer: A) A contract to exchange fixed and floating interest rate payments
- Which of the following measures the relationship between bond price and interest rate changes?
- A) Yield to maturity
- B) Convexity
- C) Credit spread
- D) Debt ratio
- Answer: B) Convexity
- How can rising interest rates impact consumer spending?
- A) It encourages more borrowing.
- B) It generally reduces consumer spending.
- C) It has no impact on consumer behavior.
- D) It increases savings rates only.
- Answer: B) It generally reduces consumer spending.
- What is the primary tool used by central banks to influence interest rates?
- A) Fiscal policy
- B) Open market operations
- C) Consumer credit
- D) Inflation targeting
- Answer: B) Open market operations
- What is the impact of falling interest rates on existing bonds?
- A) Their prices decrease.
- B) Their prices increase.
- C) Their prices remain the same.
- D) They become worthless.
- Answer: B) Their prices increase.
- What is the term for the risk that interest rates will rise after a borrower locks in a fixed rate?
- A) Basis risk
- B) Call risk
- C) Reinvestment risk
- D) Extension risk
- Answer: C) Reinvestment risk
- Which financial metric is commonly used to assess interest rate risk?
- A) Earnings per share (EPS)
- B) Net present value (NPV)
- C) Duration
- D) Return on equity (ROE)
- Answer: C) Duration
- What type of bond is least sensitive to interest rate changes?
- A) Long-term bonds
- B) Short-term bonds
- C) High-yield bonds
- D) Zero-coupon bonds
- Answer: B) Short-term bonds
- What does “flattening of the yield curve” indicate?
- A) A reduction in interest rates across all maturities
- B) A decrease in long-term rates relative to short-term rates
- C) An increase in inflation expectations
- D) An increase in long-term rates relative to short-term rates
- Answer: B) A decrease in long-term rates relative to short-term rates
- What is the primary risk associated with adjustable-rate mortgages (ARMs)?
- A) Credit risk
- B) Interest rate risk
- C) Liquidity risk
- D) Operational risk
- Answer: B) Interest rate risk
- Which of the following can indicate an impending rise in interest rates?
- A) Decreasing inflation rates
- B) Central bank rate hikes
- C) Increased consumer spending
- D) Rising stock prices
- Answer: B) Central bank rate hikes
- What is “basis risk” in the context of interest rates?
- A) The risk of interest rates moving in opposite directions
- B) The risk that two interest rate instruments will not move in tandem
- C) The risk of changes in credit spreads
- D) The risk associated with fixed-rate bonds
- Answer: B) The risk that two interest rate instruments will not move in tandem
- Which of the following is an effect of interest rate risk on corporate finance?
- A) It simplifies budgeting.
- B) It increases the predictability of cash flows.
- C) It can affect capital investment decisions.
- D) It eliminates the need for financial planning.
- Answer: C) It can affect capital investment decisions.
- What is a “call option” in relation to bonds?
- A) A feature that allows bondholders to redeem bonds early
- B) A right to purchase a bond at a fixed price
- C) A way to increase interest payments
- D) A strategy to reduce duration risk
- Answer: A) A feature that allows bondholders to redeem bonds early
- Which scenario represents a “steepening” yield curve?
- A) Short-term interest rates rise more than long-term rates.
- B) Long-term interest rates rise more than short-term rates.
- C) Both short-term and long-term rates fall equally.
- D) All rates remain unchanged.
- Answer: B) Long-term interest rates rise more than short-term rates.
- How does interest rate risk influence investment strategies?
- A) Investors may prefer longer maturities in a rising rate environment.
- B) Investors may avoid bonds altogether.
- C) Investors may favor fixed-income securities when rates rise.
- D) Investors may shift towards equities in a falling rate environment.
- Answer: D) Investors may shift towards equities in a falling rate environment.
- What is the relationship between interest rates and inflation?
- A) They are always inversely related.
- B) Higher interest rates generally indicate lower inflation.
- C) Higher inflation leads to lower interest rates.
- D) There is no correlation between them.
- Answer: B) Higher interest rates generally indicate lower inflation.
- What is the risk of refinancing in a rising interest rate environment?
- A) Increased borrowing costs
- B) Decreased property values
- C) Lower credit scores
- D) Reduced loan options
- Answer: A) Increased borrowing costs
- Which type of investor is most likely to be concerned about interest rate risk?
- A) A real estate investor
- B) A bond investor
- C) A stock investor
- D) A commodity trader
- Answer: B) A bond investor
- What is “credit spread” in relation to interest rates?
- A) The difference between the interest rate of two bonds
- B) The spread between short-term and long-term rates
- C) The difference in rates charged to borrowers based on creditworthiness
- D) The difference in yields between corporate and government bonds
- Answer: D) The difference in yields between corporate and government bonds
- What is the primary goal of interest rate risk management?
- A) To eliminate all risks
- B) To stabilize cash flows and reduce volatility
- C) To maximize returns at any cost
- D) To invest solely in fixed-income securities
- Answer: B) To stabilize cash flows and reduce volatility
- What is “hedging” in the context of interest rate risk?
- A) Taking on more risk to increase returns
- B) Using financial instruments to offset potential losses
- C) Selling all financial instruments
- D) Ignoring market trends
- Answer: B) Using financial instruments to offset potential losses