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5. Risks of investing in bonds Aa Aa The higher the risk of a security, the higher its expected return will be. A bonds risk level is reflected in its yield, but understanding the different risks involved when investing in bonds is important. The following graph shows the relationship between interest rates and maturity for three security classes: US Treasury securities (USTs), AA-rated corporate bonds, and BBB-rated corporate bonds. Use the dropdown menus to label each securitys profile correctly: YIELD [96] 15 12 5 10 5 20 25 30 YEARS TO MATURITYIs the default spread between the corporate bonds and the Treasury securities greater for shorter or longer maturities? Q Long-term maturities O Short-term maturities Answer the following question based on your understanding of interest rate risk and reinvestment rate risk. True or False: Assuming all else is equal, the shorter a bonds maturity, the more its price will change in response to a given change in interest rates. False O True

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Default spread between the corporate bonds and treasury securities greater for Long term Maturities

The given statement of

Assuming all else is equal, the shorter a bond's maturity, the more its price will change in response to the given change in interest rates is FALSE

Since the longer the maturity of your bond investments, the greater the price volatility.

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