alleryStart learning →Which bond fund risk describes bond prices falling as interest rates rise?
ACredit risk, tied to an issuer's ability to pay
BInterest rate risk, tied to the level of rates
CPrepayment risk, tied to bonds retired early
DInflation risk, tied to the erosion of returns
Answer & Solution
Correct answer: B. Interest rate risk, tied to the level of rates
1. Interest rate risk is the risk that the market value of bonds falls when interest rates rise.
2. It applies to any bond fund, including one holding only insured bonds or United States Treasury Bonds.
3. Funds holding longer-term bonds tend to carry higher interest rate risk.
4. Credit risk is about an issuer failing to pay its debts, which is a different failure.
5. Prepayment risk is about a bond being retired early, and inflation risk is the erosion of returns over time.
_Source: US SEC Office of Investor Education and Advocacy, "Mutual Funds and ETFs: A Guide for Investors", section Bond Funds_
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