Question

Price risk is the risk that:

	1.	the bonds in a dedicated portfolio will decrease in value in response to an increase in interest rates.
	2.	market prices will increase in value making bonds more expensive to purchase.
	3.	the principal amount will not be paid in full.
	4.	bond values will change in response to changes in inflation rates.
	5.	interest payments will be reinvested at a lower rate than anticipated.

Answer 1

Option (1) is correct

Price risk is the risk that the bonds in a dedicated portfolio will decrease in value in response to an increase in interest rates. Prices and interest rates are inversely related.

Option (2) is incorrect as increase in market value making bonds expensive to purchase is not price risk.

Option (3) is incorrect as there is no relation between price risk and principal amount repayment.

Option (4) is incorrect as change in prices due to inflation is not price risk.

Option (5) is incorrect as price risk does not involve interest payment reinvestment.